Carbon Sinks and Climate Change: Forests in the Fight Against Global Warming (Advances in Ecological Economics)

Carbon Sinks and Climate Change

ADVANCES IN ECOLOGICAL ECONOMICS Series Editor: Jeroen C.J.M. van den Bergh, ICREA Professor, Universitat Autònoma de Barcelona, Spain and Professor of Environmental and Resource Economics, Vrije Universiteit, Amsterdam, The Netherlands Founding Editor: Robert Costanza, Gund Professor of Ecological Economics and Director, Gund Institute for Ecological Economics, University of Vermont, USA This important series makes a significant contribution to the development of the principles and practices of ecological economics, a field which has expanded dramatically in recent years. The series provides an invaluable forum for the publication of high quality work and shows how ecological economic analysis can make a contribution to understanding and resolving important problems. The main emphasis of the series is on the development and application of new original ideas in ecological economics. International in its approach, it includes some of the best theoretical and empirical work in the field with contributions to fundamental principles, rigorous evaluations of existing concepts, historical surveys and future visions. It seeks to address some of the most important theoretical questions and gives policy solutions for the ecological problems confronting the global village as we move into the twenty-first century. Titles in the series include: Joint Production and Responsibility in Ecological Economics On the Foundations of Environmental Policy Stefan Baumgärtner, Malte Faber and Johannes Schiller Frontiers in Ecological Economic Theory and Application Edited by Jon D. Erickson and John M. Gowdy Socioecological Transitions and Global Change Trajectories of Social Metabolism and Land Use Edited by Marina Fischer-Kowalski and Helmut Haberl Conflict, Cooperation and Institutions in International Water Management An Economic Analysis Ines Dombrowsky Ecological Economics and Sustainable Development Selected Essays of Herman Daly Herman E. Daly Sustainable Welfare in the Asia-Pacific Studies Using the Genuine Progress Indicator Edited by Philip Lawn and Matthew Clarke Managing without Growth Slower by Design, Not Disaster Peter A. Victor Carbon Sinks and Climate Change Forests in the Fight Against Global Warming Colin A.G. Hunt

Carbon Sinks and Climate Change Forests in the Fight Against Global Warming

Colin A.G. Hunt School of Economics, The University of Queensland, Australia

ADVANCES IN ECOLOGICAL ECONOMICS

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Colin A.G. Hunt 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009930868

ISBN 978 1 84720 977 1 Printed and bound by MPG Books Group, UK

Contents List of abbreviations Foreword Preface Acknowledgements

vi viii xi xiii

Introduction 1 2 3 4 5 6 7 8

1

The making of markets for carbon and the potential of forestry offsets Forestry in the Kyoto Protocol Forestry in voluntary carbon markets Biodiversity benefits of reforestation and avoiding deforestation Measuring the carbon in forest sinks Forests as a source of biofuels Forestry in the climate change policies of selected developed countries Policies for reducing emissions from deforestation and forest degradation (REDD)

Notes Index

8 33 67 95 121 144 166 187 218 223

v

Abbreviations A AAU BTU C CAMFor CBD CCBA CCX CDM CER COP CPRS DBH DEFRA e ER ERU ETS EU FAO FCPF FP GHG Gt Ha IFPRI IMF IPCC ISO IUCN JI Kt LCER ln LUCF

afforestation assigned amount unit British thermal unit carbon carbon accounting model for forests Convention on Biodiversity Climate, Community and Biodiversity Alliance Chicago Climate Exchange Clean Development Mechanism certified emission reduction conference of parties to the UNFCCC Carbon pollution reduction scheme diameter at breast height Department of Environment, Food and Rural Affairs equivalent emission reduction emission reduction unit emission trading scheme European Union Food and Agriculture Organization Forest Carbon Partnership Facility for profit greenhouse gas gigatonne hectare International Food Policy Research Institute International Monetary Fund International Panel on Climate Change International Organization for Standardization International Union for the Conservation of Nature Joint Implementation kilotonne long-term certified emissions reduction log number land-use change and forestry vi

Abbreviations

LULUCF M m M&P MSC NCAS NCAT NGO NP O2 R RED REDD RGGI RMU SBSTA T TCER Tg UK UN UNEP UNFCCC US USEPA VCS VCU VER

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land use, land-use change and forestry million meter Modalities and procedures marginal social cost National Carbon Accounting System National Carbon Accounting Toolbox Non-government organization not for profit oxygen reforestation reduction in deforestation reduction in deforestation and forest degradation Regional Greenhouse Gas Initiative removal unit Subsidiary Body for Scientific and Technological Advice tonnes temporary certified emission reduction teragram United Kingdom United Nations United Nations Environment Programme United Nations Framework Convention on Climate Change United States of America United States Environment Protection Agency Voluntary Carbon Standard verifiable carbon unit verified emission reduction

Foreword Mankind is faced with the long-term specter of global warming and its negative environmental and economic consequences. The need to respond effectively to this threat is now more widely accepted than ever before. However, on the eve of preparations to develop a successor to the Kyoto Protocol, another problem has come to the fore: namely the global economic recession which became apparent in 2008. It is expected to deepen and continue for some time and in the immediate future will influence government policies for addressing global warming. It has already done so in Australia’s case. It seems likely that international negotiations at Copenhagen in December 2009 to plan a successor to the Kyoto Protocol will be affected by it; for example, emphasis may be on greenhouse gas measures that add to employment in the short-term, and policies that reduce employment are likely to be avoided. Global warming is attributed by most scientists to the growing accumulation of greenhouse gases in the atmosphere as a result of anthropogenic activities, primarily economic activities. Carbon dioxide is the main greenhouse gas accumulating in the atmosphere. Continuing global deforestation is a significant contributor to carbon dioxide emissions, and other land-use changes (such as loss of other vegetation and organic matter in soil) also add to these emissions. Forests are ‘doubly’ important in fighting global warming: (1) on the one hand, deforestation adds CO2 to the atmosphere as the carbon contained in the forest is burnt or decomposes, and (2) an increase in forest biomass (or more generally plant biomass) extracts CO2 from the atmosphere and stores it. Trees and other plants (as well as some lower order organisms) that rely on photosynthesis for their continuing existence extract CO2 from the atmosphere. There is biophysical evidence that the expansion of forests and tree cover can significantly help to reduce the rate at which CO2 is accumulating in the atmosphere due the combustion of fossil fuels. Nevertheless, as Colin Hunt makes clear in this contribution, governments cannot rely just on biophysical relationships in developing policies to combat global warming, even though it is necessary to consider these relationships. The success of global warming policies and the contribution of forestry depend on the deepness of the global cuts in emissions agreed. Within countries, socioeconomic conditions and the formulation and execution viii

Foreword

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of these policies is considerably constrained by political considerations and institutional structures. Colin Hunt’s Carbon Sinks and Climate Change: Forests in the Fight Against Global Warming provides a timely and constructively critical analysis of the prospects for using forest policy to combat global warming. The initial focus in his book is on the use of economic instruments such as tradable carbon credits, market systems, subsidies and taxes and other economic measures to achieve desired goals. However, Hunt’s findings in this regard are tempered by his consideration of the constraints on forest policy imposed by political structures and environments as well as the transaction costs involved in the implementation and monitoring of compliance. In addition, constraints generated by previous policy choices are considered. Thus some path-dependence is recognized in the development of global warming policies. Consequently, global warming policies based on neoclassical economic analysis (which has been center-stage) are modified by taking into account features of importance in both old and new institutional economics. There is overriding emphasis on the practicality of policies. A narrow economic approach is avoided. This is to be welcomed. A feature of this book is its careful attention to current global warming policies affecting forestry. After providing a very useful overview of the subject matter of this book and an accessible general outline of carbon policies and forestry offsets, Hunt gives particular attention to forestry in the Kyoto Protocol and the development of voluntary carbon markets. However, optimal land use is not just about carbon sequestration. For example, forests have multiple attributes, of which their role as carbon sinks is just one. One important aspect of forests is their contribution to biodiversity conservation. As pointed out and discussed by Hunt, forest policy intended to moderate global warming needs to be modified to take this aspect into account. Further modifications may also be required to allow for local and regional environmental spillovers generated by forests. Hunt also considers the problem of measuring the amount of carbon contained in forests as well as new challenges that are likely to arise in the future as forests start to be used to produce biofuels. As underlined by Hunt, many policies to produce biofuels add to greenhouse gas emissions rather than reduce these when the whole chain of production is taken into account. A large-scale switch out of food crops to growing plantations for carbon credits in developed countries needs to be monitored for its effect on global food prices and on emissions elsewhere. At the personal level, Hunt has been actively involved for some years in afforestation and reforestation projects as a volunteer. He therefore values

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such projects. At the same time, this passion has not blinded him to the socioeconomic obstacles to using forest policy to lower the rate of global warming. For example, he argues that Nicholas Stern has been overly optimistic in his assessment of the role that forest conservation can play in moderating global warming. One reason for Hunt’s skepticism is that Stern has, in his view, underestimated the opportunity costs and transaction costs of sustaining forests in developing countries. Furthermore, in developing countries there are several important political constraints to the avoidance of deforestation. Hunt is relatively optimistic about the socioeconomic prospects of managing forests in developed countries as a way to offset greenhouse gas emissions and less so (to some extent pessimistic) about this happening in less developed countries. But he acknowledges that if developing countries such as India and China were to accept caps on their emissions (something that he believes necessary if emissions are to be reduced to a level that will avoid dangerous climate change), afforestation would likely become an important component of these countries’ forestry policies. This book will make a significant contribution to the debate about what type of policies should be adopted to combat global warming after the Kyoto Protocol expires in 2012. Clem Tisdell Professor Emeritus School of Economics The University of Queensland

Preface Nothing pleases me more than to look down on a primary tropical rainforest, the greenness interrupted here and there by a tree in flower, the canopy punctuated by great emergents and knowing that the whole teems with life. It is also satisfying to look across the landscape to where a dark line of a thriving plantation provides a contrast to the grassland in the foreground. While one can romanticize about forests, I have set out to be realistic in assessing their role in augmenting and complementing the deep cuts that need to be made in the burning of fossil fuels. This book took some 14 months to write, but its gestation was much longer. As a boy, biking to school in London, I was concerned about the impacts of exhausts from factories and vehicles, and in an early physics lesson I saw how heat rays were trapped by carbon dioxide. I was only partly reassured by the knowledge that trees were splitting carbon dioxide molecules and incorporating the carbon: how effective would forests be against the inexorable increase in emissions? During my work in agricultural development I became acquainted with diverse forests in many countries. On my journey to Southern Rhodesia (now Zimbabwe), to work as a soil and water conservation officer, I marveled at the endless savannahs of southern Africa. Later, I visited the vast tropical rainforests of Indonesia, the Solomon Islands and Papua New Guinea, but I also saw their destruction first hand. Later still, I achieved an ambition of living and working in Papua New Guinea, much of the time researching sustainable alternatives to logging. Returning to Australia to live adjacent to the rare remaining rainforests of far north Queensland, I spent several instructive years as a volunteer with Trees for the Evelyn and Atherton Tablelands Inc. (TREAT). I believe there is no better place than TREAT to learn the practicalities of rainforest restoration (from seed collection to maintenance regimes) and the establishment of wildlife corridors. In 2004 I was fortunate in being offered a position as lecturer in socioeconomics and environmental policy at the nearby School for Field Studies (SFS), an American school affiliated with Boston University. The SFS philosophy emphasizes field-based projects. I took the opportunity of employing students (to our mutual advantage) to measure the carbon stored and its value in the tropical rainforests and plantations of the area. xi

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These experiences resulted in the delivery of a paper on the economics and ecology of carbon sequestration and a workshop on emission trading to the United States Society for Ecological Economics Conference, in New York, in June 2007. Publisher Edward Elgar had mounted a stall at the conference and there were conversations with the publisher’s representative, Heather Perkins, about the need for a book on the role of forestry in climate change policy. In October 2007 I was delighted to receive an invitation from Alan Sturmer to produce this book. Chapters in the book are designed to stand alone, but they are also unavoidably interdependent. It is impossible to discuss the effectiveness of the inclusion of forestry in the Kyoto Protocol and the potential for the inclusion of the reduction in deforestation in post-Kyoto arrangements without background in carbon markets. And underlying the role of forestry in carbon markets is the need for understanding the practicalities of measuring, and the difficulties of guaranteeing, the carbon captured by forests. The nations of the world are due to convene in Copenhagen in December 2009 to discuss, and hopefully to formulate, the successor to the Kyoto Protocol, which expires at the end of 2012. The election of Barack Obama changed the political landscape; comprehensive participation in addressing climate change now seems more likely. However, the financial and economic crisis will constrain the actions of leaders of developed and developing nations alike. Whatever the rate of progress in negotiations, the agenda will nevertheless continue to include the need for protection of existing forests and the establishment of new ones. It is my hope that interested parties and policymakers will find insights in the book that contribute to appropriate roles being given to forestry in climate change policy.

Acknowledgements The unstinting moral support from my wife, Maxine Pitts, made the task enjoyable. The generous material support from my son, Justin Hunt, made the book possible. A visiting fellowship in the Economics School at Queensland University in 2008 and 2009 provided access to library resources that are second to none. For this privilege I thank Professor Emeritus Clem Tisdell and Professor John Foster. Appreciation is extended to authors for the permission to use figures, as follows: Figure 1.3, Satoshi Kambayashi; Figure 1.4, Mike Apps and Gert-Jan Nabuurs; Figure 2.4, Till Neeff; Figures 2.5a and 2.5b, Bruno Locatelli; Figure 2.5e, Neil Bird, Michael Dutschke and Lucio Pedroni; Figure 4.3, The Ozone Hole Inc.; Figure 6.3, Thomas Adams and University of Georgia Research Foundation; Figure 8.4, Danillo Mollicone; Figure 8.5, Lorenzo Ciccarese, Michael Dutschke, Philip Fearnside, Sandra Brown and Daniel Murdiyarso on behalf of the late Bernard Schlamadinger; and Figure 8.7, Scott Willis. Alan Sturmer of Edward Elgar provided prompt and valuable advice throughout and Suzanne Mursell of Edward Elgar provided timely editorial assistance. C.H. Brisbane January 2009

xiii

Introduction A range of techniques is employed in teasing out the role of forestry in tackling climate change. Socioeconomic analysis complements the technical data, and in most chapters leads to a policy position being taken. The introduction gives a flavor of the book and summarizes what are considered the major issues surrounding forestry’s role. Global warming is the greatest known challenge facing the world. While future armed conflicts or global pandemics could possibly be more sudden in their devastation, human-induced climate change is already a reality, and we know that, unchecked, it will visit dire consequences on future generations (Parry et al., 2007). We only have a few years in which to act to keep the rise in concentration of greenhouse gases within the limits that will avoid dangerous climate change (den Elzen and Meinshausen, 2007). In economic theory, and in practice, substitutes for depleted resources are readily available. If we run out of potable water supplies because climate change has affected rainfall patterns we can substitute recycled waste-water or desalinated sea water. When agricultural land becomes scarce we substitute fertilizers and pesticides for land, and so increase crop yields. However, there is no substitute for the capacity of the atmosphere, the oceans and the forests to act as sinks and absorb our gaseous wastes, and we are far exceeding that capacity. Unless these wastes can be channeled into caverns and deep into the oceans, a solution that seems unlikely in the time available, we have little choice but to cut our reliance on fossil fuels and bring the output of greenhouse gases into balance with the absorptive capacity of the planet. Trees in forests take in carbon dioxide, the main greenhouse gas, and store it as carbon in their leaves, branches, trunks and roots. A tonne of carbon in trees is the result of the removal of 3.67 tonnes of carbon dioxide from the atmosphere. The world’s forest ‘sink’ already holds more carbon than is in the atmosphere (Prentice et al., 2001), but part of that sink is being reduced rapidly by the cutting of forests in tropical developing countries, contributing some 17 percent to global greenhouse gas emissions. Forestry, which includes the maintenance of existing forests as well as increasing forest area, can make a very important contribution to the mitigation of global climate change, but only a small proportion of this potential is being realized (Nabuurs et al., 2007; Capoor and Ambrosi, 2007). 1

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Carbon sinks and climate change

INCENTIVES AND MARKETS William Nordhaus (2007: 20) provides salutary advice: ‘[I]t is unrealistic to hope that major reductions in emissions can be achieved by hope, trust, responsible citizenship, environmental ethics, or guilt alone.’ Climate change mitigation requires finance: just reducing deforestation will cost billions of dollars every year for the foreseeable future. Who is going to put up this kind of money? The solution that has most promise is to harness the market. Creating a demand for allowances to emit greenhouse gas reduction and allowing their trade is the approach adopted by the United Nations Framework Convention on Climate Change in its Kyoto Protocol. Most rich countries have accepted emission allowances that are less than 1990 levels. To comply with their caps, countries are bound to adopt domestic policies that restrict greenhouse gas emissions. The cost of compliance is reduced by the ability of countries to trade emission allowances. If the price of allowances is above the cost of abatement, there is an incentive for the country to cut to below its cap and sell surplus allowances to countries with costs of abatement above the price of allowances, and the overarching cap is still achieved. The policy instruments available to countries to reduce emissions within their borders boil down to two main types: a tax on greenhouse gas emissions, and this can easily be applied to the use of fossil fuels depending on their carbon content; or a cap on emissions by industries and businesses, and making the emission allowances tradable. These policies can be complemented by subsidies for research and development and adoption of new technology that makes targets cheaper to achieve. If greenhouse emissions are taxed, industries and businesses can either avoid the tax if the cost of abatement is lower than the tax, or pay the tax if this is cheaper than abatement. Governments with greenhouse gas taxes can give a role to reforestation by paying subsidies for, or by applying tax rebates to, the carbon dioxide removed by plantations from the atmosphere. In the alternative policy of cap and trade, so far the preferred option of several countries, reforestation can be given a role by treating a tonne of carbon dioxide removed from the atmosphere as equivalent to a tradable emission allowance. Developers of plantations can then sell the allowances generated by the carbon captured in the forestry sink. Moreover, capped industries and businesses may be allowed to offset their emissions by importing allowances generated by forestry projects elsewhere. Whatever the means, the greenhouse gas reductions achieved are entered into the national accounts, which all participating governments are required to maintain.

Introduction

3

Thus the answer to the question ‘who pays?’ in the case of growing new forests as carbon sinks, is that industry and business will pay. Money can be made by selling emission allowances generated, or money can be saved by buying offsets rather than by abating. The effectiveness of both cap and trade and tax systems in stimulating forestry investment is dependent on the price of carbon; this in turn depends on the deepness in the cuts in greenhouse emissions or the size of the tax.

IS A TONNE OF CO2e A TONNE OF CO2e? Emission allowances to countries, and to emitters within countries, are in terms of carbon dioxide (CO2) equivalent. The major greenhouse gases are rated for their global warming potential and converted to CO2e, which is the commodity traded in the world’s carbon markets. The workings of the markets for emission allowances and the role and potential for forestry in those markets are analyzed in Chapter 1. In assessing the potential role and importance of forestry the chapter finds that there is great range in forecasts in the literature, prompting attempts at clarification in later chapters. The question that heads this section needs to be asked because the potential market is for billions of tonnes CO2e, withdrawn or withheld from the atmosphere and stored as carbon in forests’ biomass. Markets can work well if the commodity being traded is divisible, uniform and capable of accurate description. However, every forest differs and every tree in it, and so does the amount of atmospheric CO2e a tree extracts, and is expected to extract, over time. Another complicating factor when we come to estimating the carbon in forests, and hence how much CO2e has been removed, is the amount of carbon in soils and how this changes when we establish plantations. Chapter 5 discusses the sophisticated measurement techniques that need to be deployed in estimating the carbon in tracts of native forests, something that is crucial if payments are to be made for the conservation of forest carbon in the tropical zone. The chapter also emphasizes the importance of ground-truthing these estimates; a case study shows how the amount of carbon in forests can be confirmed by physical measurement. It is known with accuracy how much CO2e is released by burning a gallon of gasoline. However, buyers may not have such confidence in the amount of CO2e removed by a forest in a reforestation or a tropical forest, even after the carbon in the trees is measured. Buyers’ confidence may be eroded by the knowledge that there is a risk that a proportion of the forest’s carbon may be released any time back into the atmosphere as CO2e,

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Carbon sinks and climate change

as a result of fire, disease, accidental clearing or climate change. In these circumstances, potential investors in forest carbon have every right to discount its value. A recurrent theme in the book is how markets cope, or fail to cope, with the idiosyncratic nature of forest carbon sinks. Chapter 2 focuses on the role of forestry in international markets created under the Kyoto Protocol, including those that give flexibility to the developed nations by allowing then to mount forestry projects in other developed and in developing countries. Questions are raised about the architecture of the existing schemes and whether the market is able to deliver the volume of projects that will allow forestry to make a telling contribution to tackling climate change. A conclusion is that the rules governing forestry in the Kyoto Protocol should be changed only at the margin to eliminate inconsistencies. If the global price of carbon rises, for example as a result of deeper global cuts in global emissions agreed at the Copenhagen conference in December 2009, the interest in afforestation and reforestation will increase from its present low level. However, it is argued that the inherent nature of forestry (as reflected in unfavorable prices, costs and risks) means that afforestation and reforestation under the Protocol is likely to remain less attractive to private investors than other types of offsets. The informal markets are developing quite outside the formal architecture of the Kyoto Protocol and official domestic climate change policies of countries. These so-called ‘voluntary’ markets allow investors anywhere, large and small, to buy into projects that are conserving carbon in new forests or that are protecting forests. By doing so they offset a quantity of their own emissions. These types of investors can be distinguished from the corporates responding to taxes or caps on emissions in that their motivation for investing is pure altruism, desire to create a favorable image, reduce guilt, or a combination of all three. Chapter 3 reports on research that delves into the rather chaotic voluntary market and finds that most voluntary forestry offsets are sold before they have been verified as existing, that is before the trees have had a chance to grow; that is they are offsets not only in space but also in time. In fact these offsets are commonly sold on the basis that they will be still sequestering carbon in 100 years’ time, so that the question ‘Is a tonne of CO2e sequestered in a forestry offset a tonne of CO2e?’ is a very relevant one. While progress is being made in the forestry offset market in defining its product, there are still improvements to be made in the verification that carbon has actually been sequestered. This would increase the confidence of buyers of forestry offsets. The protection of the world’s remaining biodiversity in the face of the rapid clearing of forests could be said to be one of the greatest challenges of our time. Yet there is no integrated international effort backed

Introduction

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by finance to curb it. Chapter 4 asks the question whether the markets for forestry offsets and the accompanying rapid increase in afforestation and reforestation will benefit biodiversity, given that the market rewards carbon sequestered but not biodiversity conserved. It does this through case studies of projects in both developed and developing countries. Liquid biofuels will increasingly replace fossil fuels in transport. The use of biofuels derived from cellulose, including from wood, is a technique that delivers impressive greenhouse gas savings per gallon compared to the level of emission savings from crops, as detailed in Chapter 6. The commercialization of such ‘second generation’ processes will take time, however, and the price of carbon, or subsidies, will need to be high for them to fulfill their promise.

POLICY ANALYSIS AND PROPOSALS Having reviewed how measurement, markets and money enable forestry to join the fight against global warming, the actual policies being followed by some developed countries are investigated. Countries that are advanced in their policies, or that have announced their policies, are chosen for this exercise in Chapter 7. Forestry has no role in the EU Emission Trading Scheme. In contrast, in the US, Australia and New Zealand, afforestation and reforestation is likely to emerge as a very important instrument in mitigation and in reducing compliance costs. In practice, the significance of the contribution of forestry will depend on the price of emission allowances, which will depend in turn on the deepness of emission cuts. Domestic policies governing the acceptance of emissions allowances from forestry projects and constraints applied to the use of forestry offsets will also determine the importance of forestry’s role. The impact on global food prices of the subsidization of biofuels mainly derived from annual crops in the United States and the European Union is an issue that surfaced in 2008. These subsidies were found to be perverse incentives in that they had the indirect effect of increasing emissions from tropical forests in Brazil and south-east Asia. Large-scale diversions of land from food crops to carbon-capturing plantations will be likely to cause food prices to rise, with consequences for the poor. It is argued that the type of socioeconomic impact analysis that has been done for biofuels needs to be extended to include the impact of the future establishment of extensive forests for their carbon. Deforestation is rapid and is being driven by powerful forces, yet there is no global market for emissions abated by avoiding deforestation and degradation. Now there is a renewed interest in saving the tropical

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forests, not just because this promises immediate and major reductions in greenhouse gas emissions but also because of the rich biodiversity and the other unpriced services they deliver. Innovative mechanisms are now being trialed and introduced, outside the Kyoto Protocol, to reward the retention of standing forests. Devising schemes for prevention of deforestation in tropical developing countries raises the same set of marketing problems as afforestation and reforestation, that is defining the product and permanence of the forest. There is also a new set of complications that needs to be dealt with before the market will channel funds to prevent the main cause of deforestation, which is the conversion of land to agriculture. The process of conversion has been going on for millennia, enabling an increasing world population to be fed (Williams, 2003). But in the case of preventing deforestation in tropical countries, the buyer of carbon needs to be sure that the avoidance of deforestation being paid for would not have happened anyway. Even when the investor is satisfied that a forest has genuinely been saved from clearing, a doubt may remain about whether the deforestation avoided has not simply been transferred to another location. There are many beneficiaries of tropical deforestation and conversion to agriculture from humble growers to industrial giants and illegal loggers. Governments are also large beneficiaries through taxes on logs and on agricultural commodities. The burning question addressed in the last chapter is: given the social, economic and political implications of reducing deforestation (not to mention technical requirements), can markets be harnessed to make it an effective climate change strategy and, if not, what are the alternatives?

REFERENCES Capoor, K. and P. Ambrosi (2007), State and Trends of the Carbon Market 2007, Washington, DC: World Bank. den Elzen, M. and M. Meinshausen (2007), ‘Multi-gas emission pathways for meeting the EU 2oC climate target’, in H. Schellnhuber, W. Cramer, N. Nakicenovic, T. Wigley and G. Yohe (eds), Avoiding Dangerous Climate Change, Cambridge, UK: Cambridge University Press, pp. 299–309. Nabuurs, G., O. Masera, K. Andrasko, P. Benitez-Ponce, R. Boer, M. Dutschke, E. Elsiddig, J. Ford-Robertson, P. Frumhoff, T. Karjalainen, O. Krankina, W. Kurz, M. Matsumoto, W. Oyhantcabal, N. Ravindranath, M. Sanz Sanchez and X. Zhang (2007), ‘Forestry’, in B. Metz, O. Davidson, P. Bosch, R. Dave and L. Meyer (eds), Climate Change 2007: Mitigation, contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge, UK and New York: Cambridge University Press, pp. 541–84.

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Nordhaus, W. (2007), ‘The challenge of global warming: economic models and environmental policy’ (draft), available at www.econ.yale.edu/~nordhaus/ DICEGAMS/DICE2007.htm. Parry, M., O. Canziani, J. Palutikof, P. van der Linden and C. Hanson (eds) (2007), ‘Summary for policymakers’, in IPCC, Climate Change 2007: Impacts, Adaption, and Vulnerability, Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge, UK: Cambridge University Press, pp. 7–22. Prentice, C., G. Farquhar, M. Fasham, M. Goulden, M. Heimann, V. Jaramillo, H. Kheshgi, C. Le Quéré, R. Scholes and D. Wallace (2001), ‘The carbon cycle and atmospheric carbon dioxide’, in J. Houghton et al. (eds), Climate Change 2001: The Scientific Basis, Contribution of Working Group 1 to the Third Assessment Report of the International Panel on Climate Change, Cambridge, UK: Cambridge University Press. Williams, M. (2003), Deforesting the Earth: From Prehistory to Global Crisis, Chicago and London: University of Chicago Press.

1.

The making of markets for carbon and the potential of forestry offsets

The atmosphere can be characterized as an unmanaged commons in which pollution by greenhouse gases (GHGs) is unrestricted, and emissions by one party reduce the welfare of all other parties. Because of the cumulative rise of unassimilated concentrations of GHGs over time and the delay in the manifestation of their impact on climate, it is future generations who will pay the heavy price of unconstrained pollution. The need to rein in GHGs is an urgent one, and one that requires deep cuts to global emissions if serious economic and social costs of climate change are to be avoided. The first part of this chapter is devoted to an exploration of the options available for controlling international and national GHGs with a focus on how markets work to lower the costs of compliance with emission targets. The markets for carbon that ensue from cuts are in terms of carbon dioxide equivalent (CO2e) where the main greenhouse gases, listed in Annex B of the Kyoto Protocol (United Nations, 1998), are expressed in terms of their equivalence to CO2 in global warming potential. The second part of the chapter takes a look at the potential role of forestry in the market mechanisms for mitigating climate change.

1.1

EMISSION TAXES

One obvious way to control greenhouse emissions globally is to put a tax on emissions of CO2e. The tax would need to be the same per tonne of CO2e across countries and sectors. All emitters facing the tax would reduce their output of gases so that the cost of reduction of the last tonne of CO2e they emitted equals the emission tax. This is so because the cost of control of pollution rises with the level of control, so that if the cost of control is greater than the tax at the margin then the units controlled are cut back. If the cost of control of the last unit is less than the tax, then more units are controlled. The tax is a very efficient instrument because all polluters are motivated to cut to a point where their marginal abatement 8

Markets for carbon and potential of forestry offsets

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cost equals the tax, and the cost of exercising controls across the board is minimized. Prominent economist Nordhaus (2007) supports a tax system because of the cost uncertainties of quantitative limits on emissions, and because the public receives revenues from the taxes that can be applied to minimize social problems caused by the tax. The UK’s Climate Change Levy is a direct carbon tax. For an effective and efficient global tax policy there are two conditions: ● ●

The rate of carbon tax needs to be uniform across countries, developed and developing alike; The level of tax needs to reflect the marginal damage cost of CO2e emissions, that is the damage caused by the emission of one extra tonne of CO2e to the atmosphere.

A question is how uniform taxes could be applied to developed and developing countries, given the equity and welfare implications of taxes in the latter (Aldy et al., 2003). Moreover, there is already a raft of different taxes across countries applying to fossil fuels. For example, gasoline taxes tend to be relatively heavy in Europe compared with the US (Babiker et al., 2003). It can be concluded that the fundamental and universal tax reform across countries that is needed to make the tax on the carbon content of fuels uniform, would be very difficult to achieve politically, given the budgetary and socioeconomic implications. The second condition for an effective tax is its link to the marginal damage cost, or marginal social cost of CO2e emissions. The marginal social cost represents the optimal carbon price or optimal carbon tax, given that it balances the incremental costs of abating CO2e emissions with the incremental benefits. But estimates of marginal social costs in the literature are many, and they vary greatly. Tol (2007) reviewed 211 published estimates under business-as-usual (that is with no comprehensive system for reducing emissions in place). The peer-reviewed studies reported ranges from 2US$0.6 to $136 per tonne of CO2e, with a mean around $35 and a standard deviation of $66. A major cause of the variations is the choice of discount rate. The difficulties posed by the choice of discount rate are summarized in Box 1.1. An illustration of how changes in the discount rate can produce very different results in calculating the marginal cost of emissions, and therefore the benefit of marginal abatement, is illustrated by the change in present value of $100 in a hundred years’ time, at different discount rates (see Table 1.1). Apart from the different equity weightings adopted in different studies,

10

Carbon sinks and climate change

BOX 1.1

SETTING A TAX ON EMISSIONS: THE DILEMMA OF THE DISCOUNT RATES

Climate change will intensify as global temperatures rise with increasing concentrations of GHGs in the atmosphere. Economic growth fueled by the burning of fossil fuels will continue to add emissions to an atmosphere whose absorptive capacity has already been exceeded. Estimation of the global economic costs of climate change and particularly the marginal costs of a unit of CO2e emissions is important in that it signals the optimal tax that should be imposed. What makes this exercise difficult is that emitters are separated in time from the consequences of their emissions; the current generation bears the costs of the climate benefits felt by future generations. Economists typically discount the future taking trends in the long-term bond rate together with the expectation that people in the future will be better off than they are today. Studies of the costs of climate change commonly discount the future at a rate of 3 percent. Recently, however, there has been much argument about rates as result of the Stern Review (Stern, 2006), in which discount rates employed were very low, thus generating high estimates for the cost of future emissions. Stern argues that discounting techniques that apply to changes at the margin where one project is being compared with another should no longer apply to costing global changes at a global scale. Moreover, recognition that relatively poor people will be most impacted by climate change is another reason why discount rates should be eased. the underlying assumptions in climate models can also change the size of damage costs. An example is provided by Nordhaus. In 1999 he estimated the optimal tax to be US$2.50, but in his 2007 study the optimum tax had risen to US$7.50 per tonne of CO2e (Nordhaus, 2007: 62).1 The latter estimate is still lower than the mean of study estimates reported by Tol (2007), however, due to the fact that Nordhaus applies a relatively high discount rate of 4 percent to future damage costs. One way of overcoming the problem of uncertainty of the optimum tax would be to introduce a tax at a modest level and then to adjust it upwards while monitoring the impact on GHG emission levels. It is expected that

Markets for carbon and potential of forestry offsets

Table 1.1

Present cost of $100 in 100 years’ time at various discount rates

Discount rate % 4.0 3.0 1.0 0.1

11

Present value $ 1.98 5.20 36.97 90.47

the tax would need to be increased by some 2.4 percent yearly, simply to keep pace with the increase in the marginal social cost of carbon emissions (IPCC, 2007: 822). Nordhaus suggests rises from US$9.30 per tonne of CO2e in 2010 to $11.40 in 2015, $24.50 in 2050 and $56.40 in 2100. While taxes are unwieldy on a global scale they are a more feasible option for adoption by individual countries in meeting their national targets. Tax harmonization is relatively easy within a country and the direct flow of tax revenues, which are then available to assist adjustment among sectors of society affected by the tax, is attractive to governments. Within countries that adopt taxes, tax rebates or subsidies can apply to the CO2e reductions achieved by reforestation.

1.2

SUBSIDIES TO ACHIEVE EMISSION REDUCTIONS

An alternative to taxes to change behavior is subsidization of the introduction of low emission technology. Australia is an example of a country that paid heavy subsidies to industry to achieve its Kyoto target of an 8 percent increase in emissions. (While Australia had refused to ratify the Protocol until 2007, it nevertheless still maintained a national goal of meeting its target.) Even though Australia invested some A$2 billion in subsidies, its total emissions from power generation, industry and transport rose well above target. Fortuitously, the states of New South Wales and Queensland banned clearing of native vegetation in 2004 and it is this, rather than its national greenhouse policies per se, that has enabled Australia to come close to meeting its target (Hunt, 2004). The choices for countries boil down to either ‘price’ or ‘quantity’ instruments. The price instrument, as we have seen, gives some certainty as to cost but does not fix the quantity of emissions. A system that fixes the quantity of emissions and allows the trading price per tonne to vary is commonly known as ‘cap and trade’. In the next section cap and trade as a global system for tackling climate change is reviewed.

12

1.3

Carbon sinks and climate change

THE INTRODUCTION OF GLOBAL CAP AND TRADE

There have been scientific warnings that feedback mechanisms could cause runaway global warming. It will be necessary to attempt to meet targets in GHG emissions and caps provide a greater degree of certainty in reaching targets than a tax. Global warming requires global solutions, and setting an overall limit on global emissions is the preferred method that has been adopted by the global community. However, the caps still need to be linked objectively and effectively to temperature objectives. The process involves the setting of the total quantity of emissions at a level that will deliver a desired concentration of greenhouse gases by a certain date, and thus limit the rise in global temperatures. The introduction of taxes or the setting of targets or caps on greenhouse emissions then follows in individual countries party to a global agreement. The global scheme for capping emissions that is in place is the Kyoto Protocol (United Nations, 1998), adopted in Kyoto, Japan, on 11 December 1997, entering into force on 16 February 2005 and to date ratified by 183 countries. The major distinction between the Kyoto Protocol and the United Nations Framework Convention on Climate Change (UNFCCC, 2002) is that while the Convention encouraged industrialized countries to stabilize GHG emissions (developed countries that adopted this goal are listed in Annex I), the Protocol commits them to doing so. In recognizing that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere, due to more than 150 years of industrial activity, the Kyoto Protocol, through Article 10 (United Nations, 1998), places a heavier burden on developed nations under the principle of ‘common but differentiated responsibilities’. The Protocol, in its Annex B, thus sets binding targets for 37 industrialized countries and the European Community for reducing GHG emissions. 1.3.1

Varying Costs of Compliance Create a Global Market

The allowances to pollute issued to developed countries are listed in Annex B of the Kyoto Protocol and average 5.2 percent below countries’ 1990 levels. Annex B countries have each been issued with assigned amounts which together equal the total amount of CO2e emissions agreed for 2008–2012. For example Great Britain and Northern Ireland agreed to cut their CO2e emissions by 8 percent. Their assigned amount for the first commitment period is therefore five times 92 percent of their 1990 emissions. A country can express all or part of its assigned amount in terms of tradable assigned amount units (AAUs).

Markets for carbon and potential of forestry offsets

13

While it may be equitable for industrialized nations to bear similar burdens in terms of a cap, the fact is that the costs of compliance will vary between countries. This cost disparity, together with the ability to trade, engenders a market for AAUs; the buyers of AAUs, which are in tonnes of CO2e, reduce their costs of compliance, and the sellers make deeper cuts but at a cost lower than the market price for AAUs. The overall amount of allowances remains the same, but trade allows the achievement of the target at least cost. The tighter the cap, the higher the price per tonne of CO2e in the market because of the increased demand for allowances by high-cost emitters. Figure 1.1 illustrates trade in AAUs in a two-country model. The system accommodates trading of AAUs government to government, government to authorized trader, and vice versa, and authorized trader to authorized trader. Forward contracts and call options on AAUs can be sold, and any entity authorized by an eligible Annex I party can buy. The first trade in AAUs was brokered in 2002 between an Eastern European government (the seller) and a Japanese corporation (the buyer) (Evolution Markets, 2002). The previous section suggested that the marginal social cost (MSC) of a tonne of CO2e should equal its price. While it was shown that there are very wide variations in estimates of the MSC, the price in the market can nevertheless be monitored under the cap and trade system adopted globally to see how the trading price of allowances compares with MSC estimates. If the price of carbon in the market is well below the MSC then there are benefits in tightening the cap and raising the price. On the other hand if the MSC is well above estimates of MSC there are benefits in loosening the cap and lowering the price. 1.3.2

Offsets in the Global Market

The Kyoto Protocol allows Annex B countries to offset their emissions by undertaking projects, including forestry projects, and to record the offsets in their national carbon accounts (UNFCCC, 2008b). Net removals of greenhouse gases from eligible land-use change and forestry (LULUCF) activities generate so-called removal units (RMUs), equal to 1 tonne of CO2e, that Parties can count against their emission targets. They are deemed valid only when the removals have been verified by expert review teams under the Protocol’s reporting and review procedures, and they cannot be banked (that is credits cannot be carried over to future commitment periods). The Marrakesh Accords (UNFCCC, 2008b) provide definitions for four additional LULUCF activities, these being:

14

Carbon sinks and climate change

Country A tCO2e Purchase AAUs

1990

2008

2012

Country B tCO2e

Sell AAUs

1990

2008

2012

1990 emissions Reduction commitment Actual emissions Note: Country A and Country B have the same emissions in 1990 and an equal commitment to reduce by 5% below their 1990 base year emissions. Country A purchases AAUs to cover emissions 10% above commitment. B achieves its target of 95% of 1990 emissions and, while doing so, also sells AAUs to satisfy B. The combined AAUs held by the two countries in the commitment period, 2008–2012, amounts to 5% below the 1990 level.

Figure 1.1

● ● ● ●

A two-country model of trade in Assigned Amount Units (AAUs), each equal to 1 tonne of CO2e

forest management; cropland management; grazing land management; and revegetation.

Markets for carbon and potential of forestry offsets

15

Parties to the Protocol may choose to include any of these activities to help meet their emission targets; the choice is then fixed for the first commitment period. While the Protocol allows these activities domestically, it has a special scheme, the Clean Development Mechanism (CDM), to facilitate the offsetting of GHGs by mounting projects in non-Annex B (developing) countries. The tradable units generated by these offsets are certified emission reduction units (CERs) (UNFCCC, 2008a). The CDM allows two types of forestry projects, afforestation (on land that has not been forested for at least 50 years) and reforestation (on land that was forested but did not contain forest on 31 December 1989). The Conference of the Parties (COP) 7, at Marrakesh in 2001, decided that greenhouse gas removals from such projects may only be used to help meet emission targets up to 1 percent of an Annex B party’s base year emissions for each year of the commitment period (UNFCCC, 2008b). Projects under the CDM are expected to achieve sustainable development objectives as well as creating carbon sinks. The mechanism for offset projects in other Annex B countries is known as Joint Implementation (JI). JI projects, including afforestation and reforestation, generate emission reduction units (ERUs). The forestry components of the Protocol are summarized in Box 1.2. Outside the CDM and national cap and mandatory cap and trade schemes, forestry is a global mechanism by which companies, institutions and individuals can participate directly in climate change mitigation on an unofficial basis. But these ‘voluntary’ offsets generally do not comply with the strict methodologies for additionality and verification demanded under the Kyoto Protocol, so that emission abatement by voluntary offset projects does not enter the national carbon accounts of countries. The Chicago Climate Exchange (CCX) with subsidiaries in Europe, Montreal, the US North East and New York is a unique institution in that participation is voluntary but caps are mandatory. The CCX facilitates trade between members who have voluntarily signed up to its mandatory reductions policy of reducing CO2e emissions by 6 percent below the 1998–2001 baseline by 2010. Trades are mainly between members either below or above their targets, but forestry offsets are an option. Chapter 2 deals in detail with the mechanisms of the CDM of the Kyoto Protocol and how national schemes might link with it. 1.3.3

In-country Cap and Trade

National or regional cap and trade schemes are designed to achieve the same objective as the global Kyoto Protocol, that is an emissions target at least cost. In order to meet their targets, individual Annex B countries

16

Carbon sinks and climate change

BOX 1.2

THE KYOTO PROTOCOL AND FORESTRY CARBON SINKS

The accounting period in which Annex I Parties to the UNFCCC that have ratified the Kyoto Protocol need to meet their emission targets, as specified in the Protocol, begins in 2008 and ends in 2012. These targets are expressed as levels of allowed emissions, divided into ‘assigned amount units’ (AAUs); each AAU being equal to one tonne of CO2e. Emissions trading allows countries that have emission units to spare, that is emissions permitted them but not ‘used’, to sell this excess capacity to countries that are over their targets (United Nations, 1998: Article 17). Parties to the Protocol may offset their emissions by increasing the amount of greenhouse gases removed from the atmosphere by so-called carbon ‘sinks’ in the land use, land-use change and forestry sector. The activities in this sector that are eligible are afforestation, reforestation and revegetation. The Kyoto carbon accounting rules specify that, to qualify, reforestation or afforestation must take place on land cleared before 1990. Greenhouse gases removed from the atmosphere through eligible sink activities generate credits known as removal units (RMUs). These are interchangeable with AAUs which can be traded internationally. The amount of credit that can be claimed by parties through forestry is subject to a cap. The Protocol also establishes three mechanisms known as Joint Implementation (JI), the Clean Development Mechanism (CDM) and emissions trading. These are designed to help Annex I Parties cut the cost of meeting their emissions targets by taking advantage of opportunities to reduce emissions, or increase greenhouse gas removals that cost less in other countries than at home. Under the CDM, Annex I Parties may implement projects in non-Annex I Parties that reduce emissions and use the resulting certified emission reductions (CERs) to help meet their own targets. The CDM also aims to help non-Annex I Parties achieve sustainable development and contribute to the objective of the Convention (UNFCCC, 2008a). At the end of the first commitment period a country must demonstrate compliance with its emission reduction target by holding as many, or more, AAUs, CERs, ERUs and RMUs as its actual tonnes of CO2e emissions during the period 2008–2012.

Markets for carbon and potential of forestry offsets

17

need to undertake measures to reduce their domestic emissions unless they are in surplus and in a position to sell allowances. Countries have policy choices ranging from the introduction of mandatory requirements for power generation by renewable energy, and the subsidization of renewable energy, to the introduction of a carbon tax or mandatory cap and trade schemes. All countries are interested in adopting policy approaches that do least damage to their economies and this is where carbon taxes and cap and trade have an advantage over trying to ‘pick winners’ and subsidizing them. The effect of caps on industry is to raise costs, albeit to lower levels if trade is allowed between scheme participants. The price on allowances to emit CO2e automatically makes energy sources and goods and services that are not carbon intensive more competitive. The imposition of caps on emissions by industry is a mechanism that has already been successful in controlling the level of damaging pollutants in the US, but there are no caps on greenhouse emissions in that country at the time of writing. The largest regulatory cap and trade scheme by far is the EU Emission Trading Scheme (ETS) launched in 2005. It is estimated that under the EU ETS, 2 billion tonnes of CO2e allowances changed hands, worth US$50 billion in 2007 (Capoor and Ambrosi, 2008). But while EU member countries can trade allowances with one another, and they may buy and sell CERs generated under JI or CDM projects, forestry credits cannot be generated by entities within the EU. Box 1.3 summarizes the mechanism for in-country cap and trade. There is a strong case for linking country cap and trade schemes internationally. The more participants, the greater the spread of marginal costs of abatement and the greater the gains through trade. And the deeper the market, the better its price formation. Cap and trade systems can raise money for government if emission allowances are auctioned. Their weakness, compared with a tax, is that political pressure is inevitably applied by industry facing caps. This results in permits being allocated or ‘grandfathered’ without cost to emitters. This was the case in the EU ETS where most allowances to industry at the outset were allocated rather than auctioned. Moreover, due to misreporting by industry and EU members of emissions levels, the emissions allowances were only slightly less than business-as-usual levels, causing the price of allowances to collapse. The same problem has appeared in the Regional Greenhouse Gas Initiative (RGGI) in the US, whose cap is 188 million tonnes of CO2e, but whose emissions in 2007 were only 164 million tonnes. This over-allocation resulted in a price of only US$3.07 per short ton of CO2e on 29 September 2008 (Evolution Markets, 2008).

18

Carbon sinks and climate change

BOX 1.3

CAP AND TRADE IN-COUNTRY

Under a cap and trade scheme emitters are allocated or purchase a quantity of emission allowances, an allowance being one tonne of CO2e. Emitters may then face progressive reductions over time in their allowances designed to achieve national greenhouse gas targets. The cap and trade scheme may be global, applying to nations involved in a global cap and trade scheme, for example to the industrialized Annex B countries under the Kyoto Protocol, or it may apply to companies under a mandatory cap and trade scheme within a country. The principles remain the same, whatever the boundaries of the scheme. A country that faces high cost of abatement has the option of purchasing emission allowances (AAUs) from a country that has low-cost abatement. Likewise a firm within a country that is part of a national cap and trade scheme also has the option of abatement or purchase. Each country will have different level of AAUs at the end of the period, depending on purchases and sales. Holdings of Kyoto Units from project activities are also counted along with AAUs towards overall emissions reduction and are reflected in the bottom line of the country’s carbon accounts. Reductions in AAUs below a cap can be banked against future requirements. New Zealand in 2007 enacted a national cap and trade scheme. A new government, elected in 2008, suspended the scheme and will be introducing a modified approach in late-2009 (Point Carbon, 2008). Nevertheless, the enacted scheme is summarized in Box 1.4, as it demonstrates the integration of a country scheme with global markets. The few emission cap and trade schemes in place in other countries are run by individual states or groups of states. The United States Congress refused to ratify the Kyoto Protocol and there is no national scheme to cut emissions. A cap and trade scheme passed by the House in June 2009 goes before the Senate in September, however. A regulatory scheme that allows forestry offsets is the Greenhouse Gas Reduction Scheme of the State of New South Wales. The RGGI of 10 eastern US states will cap emissions after 2009 and will include forestry. California will cap emissions after 2009 and already has a Climate Change Registry that includes forestry protocols. A new government in Australia is committed to introducing a national cap and trade scheme in 2011.

Markets for carbon and potential of forestry offsets

19

BOX 1.4 NEW ZEALAND’S CAP AND TRADE SCHEME Participants are required to hold one NZU (equal to an AAU) or a Kyoto unit2 to cover each metric tonne of CO2e emitted within the compliance period. Allowing international trading means scheme participants can buy or sell emission units without causing a significant movement in their price. Integration with global carbon markets also means that emission prices in New Zealand align with international prices. This, in turn, helps to ensure that the level of price exposure in the New Zealand economy is not too far ahead of, or too far behind, prices determined by international efforts to reduce greenhouse gas emissions. The support of the Kyoto Protocol mechanisms such as the Clean Development Mechanism, a tool for reducing greenhouse gas emissions and assisting sustainable development in developing countries, gives New Zealand businesses access to leastcost ways to reduce emissions overseas. This has the effect of limiting the cost to companies of reducing emissions. The Ministry of Economic Development administers the emissions trading and the electronic New Zealand Emissions Unit Register which records: ● ● ●

1.4

the holders of emission units and the amount of emission units held; transfers of emission units between holders; the surrender of emission units by participants in order to meet their obligations under the emissions trading scheme (Ministry for the Environment, 2008).

OPERATIONAL CAP AND TRADE AND THE BENEFIT OF OFFSETS

Offsets may be included in cap and trade schemes at both the global and national levels. An offset is a project initiated by a country or a company that will decrease emissions in another location or jurisdiction. Offsets encompass a range of projects, including the substitution of low emission fuels, the introduction of renewable energy to replace electricity from coal

20

Carbon sinks and climate change Firm A

Purchases 15

Firm B

Sales 15

Final 50 Final 110

Abatement 35

Offset 5 Note: Trade is between an emitter with high cost of abatement and an emitter with a low cost of abatement under a mandatory cap and trade scheme with offsets. The two firms each emit 100 units, but the total of allowances issued is 160 units. After abatement, trading and offsetting, the two firms hold 160 allowances and so comply with the 20% cut at the lowest possible cost.

Figure 1.2

A two-firm model of trade in CO2e emission allowances

fired power stations and the sequestration of carbon by afforestation or reforestation. The emissions offset, by reduction or capture, can be claimed by the project initiator, be it country or company, against its allowances. The motivation for undertaking projects by governments or companies is the desire to reduce the cost of compliance where offsetting a tonne of CO2e is cheaper than abatement. Under the Kyoto Protocol’s CDM the motivation can also be to capture co-benefits such as sustainable development in the country in which the offset project is initiated. A representation of the hypothetical trade in allowances between two firms and the use of offsets is shown in Figure 1.2, demonstrating how the firms make decisions that result in their compliance with the overall cap. Table 1.2 shows the financial results of the same trade between the same two firms, A and B. Each firm saves money by trading allowances or purchasing offsets. Each has an obligation to meet the requirement at the end of the compliance period. A has a marginal cost of abatement of $10 per unit of reduction of CO2e but, instead of abating 20 allowances, purchases additional allowances from B and also purchases offsets at a relatively low cost. B

Markets for carbon and potential of forestry offsets

Table 1.2

21

A two-firm model of trade in allowances

A. High Cost of Abatement ● Allowances at start 100 ● Must purchase, offset or abate 5 or > 20 allowances ● Marginal cost of abatement $10 per allowance ● Limit to offsets 5 allowances ● Fine for purchases plus offsets < 20 is $20 per allowance < 20 Record of emission trading and change in allowances for A Number 1 2 3 4 5 6 7 8 9

Allowances start Allowances purchased from B Allowances offset Allowances abated Allowances traded Fine (20 2 (15 1 5))*20 Total costa Allowances finish 100 1 15 2 5 Total cost without tradea

100 15 5 0 20 – – 110 20

Price $ per allowance – 27.50 26.50 0 27.25 – – – 210.00

$ cost – 2112.50 232.5 0 2145 0 2145 – 2200

B.

Low Cost of Abatement Allowances at start 100 ● Must abate (less allowances sold) 5 or > 20 allowances ● Marginal cost of abatement is $5 per allowance for first 30 allowances, and $7.50 thereafter ● Fine for abatement less sales <20 is $20 per allowance <20 Record of emission trading and change in allowances for B ●

1 2 3a 3b 4 5 6 7 8

Allowances start Allowances sold to A Allowances abated @ $5.00 Allowances abated @ $7.50 Allowances abated less allowances sold Fine (20 2 (35 2 15))*20 Total costa Allowances finish 100 2 15 2 35 Total cost without tradea

Note: a

Number

Price $ per allowance

$ cost

100 15 30 5 20

– 7.50 25.00 27.50 23.75

– 112.50 2150.00 237.50 275

– – 50 20

– – – 25.00

Both firms achieve a lower cost of compliance by trading.

0 275 – 2100

22

Carbon sinks and climate change

sells allowances to A at a price above its marginal cost of abatement, which rises as it abates more. B must abate 35 allowances, given that it sells 15 to A, but in doing so saves $25 because of its low cost of abatement relative to the sale price of allowances. Both A and B comply with the mandatory requirements and escape fines. The total of allowances held by A and B at the end of the period is 160, which corresponds to an overall reduction of 20 percent. In this example the use of offsets is limited. This reflects the common practice of limiting access to offsets, thereby reducing the fear that a flood of cheap offsets into the market will lower the price of allowances and discourage abatement by emitters.

1.5

THE POTENTIAL OF FORESTRY TO MITIGATE CLIMATE CHANGE THROUGH GLOBAL MARKETS

The first part of this chapter has explored the mechanisms that create markets for GHG reductions. It was demonstrated how caps on allowances to emitters and facilitating their trading gives allowances a price, as well as how trading of allowances by emitters reduces the cost of compliance. It was also demonstrated how offsets (including forestry offsets) substitute for, and are compatible with, allowances and can be incorporated into cap and trade schemes. The second part of this chapter examines the potential of increasing afforestation and reforestation and reducing deforestation to mitigate climate change. The examination is in the context of payments for CO2e removed from the atmosphere (see Figure 1.3). Discussion in the literature of ‘carbon’ in carbon sequestration and in markets is often confused by a failure to identify whether the subject is carbon (C) or carbon dioxide (CO2); Box 1.5 clarifies the relationship between the two. Up to the present, the global establishment of forests has been driven by the need for wood products or for multiple environmental benefits. It is only recently that forests have been studied for their potential to mitigate climate change through carbon sequestration. The importance of such studies is that they contribute to an understanding of the role of forests in contributing to an integrated approach to climate change mitigation policy, both nationally and globally. The timing of benefits and costs of planting new forests and the conservation of existing forests is very important in determining the cost of carbon sequestered. The carbon uptake by new forests is typified by being slow initially, followed by a period of accelerated sequestration with a maximum

Markets for carbon and potential of forestry offsets

Source:

23

© Satoshi Kambayashi, 2006.

Figure 1.3

Carbon markets make payments for measured CO2e removals from the atmosphere by forests

between 10 and 20 years, and then a leveling off as the forest matures. In contrast, the impact of prevention of deforestation is immediate. However, in both cases, most of the costs are incurred in year 0: see Figure 1.4. The fact that benefits from sustainable forest management and the planting of new forests are delayed raises questions about their value today compared with activities that generate more immediate benefits. Chapter 2 explores this issue further in the context of the Kyoto Protocol, and Chapter 3 contains a detailed analysis of the implications for markets of the timing issue in forestry. While the response times differ between forestry abatement options, all will respond to a price on carbon that makes sequestration more competitive than other land uses. 1.5.1

Estimating the Potential Role for Forests

In modeling the abatement forthcoming from different sectors, McKinsey (2007a) first estimated that to cap the long-term concentration of atmospheric CO2e at 450 ppm would require abatement of 26.7 Gt of CO2e by

24

Carbon sinks and climate change

BOX 1.5

WHAT ARE WE TALKING ABOUT IN FORESTRY OFFSETS: CARBON SEQUESTERED OR CARBON DIOXIDE REMOVED?

It is important that the difference between carbon sequestered and carbon dioxide in the atmosphere is recognized and made explicit when discussing emission trading, and particularly when it applies to forestry offsets. The following clarifies the relationship between carbon and carbon dioxide: ● ● ●

The atomic weight of carbon is 12 and that of oxygen 16; The molecular weight of CO2 is thus 12 1 16 1 16 5 44; The molecular weight of CO2 is thus 44/12 that of carbon, i.e. 3.67.

When land is cleared of trees, and they rot or are burned, carbon is released as the greenhouse gas CO2. When deforestation is prevented, C continues to be sequestered and CO2 emissions are avoided. When trees are planted, every tonne of C sequestered through photosynthesis removes 3.67 tonnes of CO2 from the atmosphere. When an emission in one place or at one time is countered by removal by tree growth elsewhere or at another time, this is a forestry ‘offset’. 2030; that is a 45 percent reduction in emissions compared with business as usual. McKinsey (2007a) then modeled the least-cost combination of abatement by sector in contributing to this target which, it was found, could be achieved at a market price of €40 per tonne of CO2e. Such modeling can be characterized as ‘top down’, in contrast to ‘bottom up’ that builds global estimates from regional studies. In allowing unfettered competition across all sectors to generate a least-cost portfolio of mitigation strategies, top-down models tend to simplify the options available. McKinsey’s (2007a) global model found that many abatement initiatives have a negative cost, including building insulation, fuel efficiency in vehicles, lighting, air conditioning and water heating, together with biofuel production from sugar cane. At low prices for carbon some forestation becomes feasible followed by greater potential for more forestation and avoided deforestation as the price of CO2e rises.

Markets for carbon and potential of forestry offsets Timing of impact: change in carbon sequestered over time

Abatement activity

Impact

Plant new forests

Increase sink

Prevent deforestation

Reduce emissions

Sustainable forest managementa Suppress disturbances,b reduce logging impact

Increase sink

25

Timing of cost: $ expenditure over time

Reduce emissions

Notes: a Sustainable forest management includes the replanting of forest after harvesting to speed up regeneration and adoption of longer rotations between harvesting. b The suppression of disturbances aims to reduce the gradual degradation of forests due to such factors as use of forests for fuelwood. Source:

Nabuurs et al. (2007: Figure 9.4).

Figure 1.4

Generalization of the timing of impacts and costs in forestry sector abatement of carbon emissions

In achieving the 26.7 Gt reduction in emissions, the potential contribution of forestry was larger than for any other sector studied. Some 35 percent of all potential abatements involved forestry, which contributes an abatement of 6.7 Gt (see Figure 1.5). At the price of €40 per tonne of CO2e, deforestation rates were reduced by 50 percent in Africa and by 75 percent in Latin America, generating 3 Gt of annual abatement by 2030. Major abatement in Asia costs more since commercial logging there has a higher opportunity cost than subsistence farming in Africa and commercial agriculture in Latin America. Other top-down modeling exercises produced similar estimates of abatement and offset potential by forestry. The IPCC (Nabuurs et al., 2007) synthesized the results from three global sector models to derive forestry’s potential by region and by type of activity (Sohngen and Sejdo, 2006; Sathaye et al., 2006; Benítez et al., 2007). Table 1.3 summarizes the results for a price of CO2e of US$50 per tonne. The results in Figure 1.5 and Table 1.3 are not directly comparable as, at the time of writing, €40 5 US$61.8. Nevertheless, there is broad agreement between the studies, the IPCC synthesis providing an estimated global abatement potential of almost 9.6 Gt CO2e compared with McKinsey’s (2007a) estimate of 6.7. The studies agree that deforestation in Africa and Central and South America is an important source of abatement. Table 1.3 also shows that

26

Carbon sinks and climate change 2.9

TRANSPORTATION Fuel efficient vehicles; Biofuels

3.7

BUILDINGS Efficient lighting, appliances Heating cooling efficiency; Insulation

6

MANUFACTURING Industrial carbon capture and storage Fuel switching e.g. biofuels Energy efficiency e.g. cogeneration

5.9

POWER Carbon capture and storage Nuclear Renewables AGRICULTURE/WASTE No-tillage agriculture Methane capture from landfills FORESTRY Afforestation/reforestation Deforestation avoided

Source:

1.5

6.7

McKinsey (2007a).

Figure 1.5

Global potential for abatement by sector, at price 5 or < €40/t CO2e, GtCO2e per year by 2030

afforestation is also an important contributer to abatement in the US and in countries in transition. If the price of CO2 rises to US$100 in the topdown models, then the potential global abatement from forestry rises by 40 percent to almost 14 Gt CO2e by 2030 (Table 1.3). 1.5.2

Forestry’s Potential in the US

The US is a country with a very large land mass, much of which is capable of growing forests. Forestry is not relied upon for economic growth as in many developing countries so that its forests and lands already represent a net forest sink. Reduction in future emissions in the US is made difficult by the fact that the country is characterized by strong population and economic growth and a reliance on carbon-based power generation. While the global financial crisis of 2008 slowed the economy, growth is expected to resume at something like previous levels as the world economy recovers. A range of sources suggest a rise in emissions from 7.2 Gt of CO2e in 2005 to 9.7 Gt in 2020, that is an increase of 35 percent. A study of abatement opportunities in the US by McKinsey (2007b) concluded that substantial reduction in GHG emissions could be secured

Markets for carbon and potential of forestry offsets

Table 1.3

Forestry project

Regional abatement potential at price 5 or < US$50/t CO2e, Mt CO2e per year, by 2030 USA

Afforestation 267 Reduced 5 deforestation Forest 922 management TOTALSa 1,166 Note: Source:

a

27

Central Africa Other Total Asia and South America

NonAnnex I East Asia

Countries in transition

315 70

354 50

540 1,550

572 1,032

572 2,751 503 3,239

636

622

429

84

701 3,584

977

1,028

2,516

1,694

1,734 9,643

The totals are summaries and larger than the sums of columns. IPCC (2007: Table 9.3).

by 2030 using a wide variety of sources at a price of $50 per tonne of CO2e. Enhancing the ability of agricultural lands and forests to offset carbon emissions made up some 10 percent of the total from all sources, absorbing 440 Mt of CO2e in the near term, that is by 2030, of which some 320 is from forests. The increase would come from enhancing forest sinks on private lands (afforestation or reforestation) and reforesting native forest after harvesting (forest management). Forest offsets, it is suggested, can be looked upon as relatively cheap options in the near term, while waiting for higher cost options of abatement to kick in. Table 1.3 forecasts a much greater role for forestry in the US than the McKinsey (2007b) study, at over 1Gt of CO2e per year, a conclusion that is backed by Richards and Stokes (2004) and the USEPA (2005). Stavins and Richards (2005) suggest that prices as low as US$7.50 and US$22.5 per tonne of CO2e would induce sequestration of around 1 Gt of CO2e. The climate change challenge has been taken up by legislative proposals that went before the US Congress in 2007 and 2008. To achieve the emission target in the bills, McKinsey (2007b) suggested that carbon prices would need to rise above US$50 per tonne of CO2e. Against this, the detailed study by Nordhaus (2007: Table V-4, p.163) suggests that the price will need to increase to only $40 per tonne of CO2e in 30 years to limit temperature rises to 2oC, which was a target included in congressional proposals. In Chapter 7 an analysis of the Lieberman-Warner Bill S. 2191 confirms that forestry offsets will play an important role in reducing the cost of compliance by industry with a national cap on emissions.

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Carbon sinks and climate change

1.6

BOTTOM-UP VERSUS TOP-DOWN MODELS AND SERIOUS QUESTIONS ABOUT THE FUTURE ROLE OF FORESTRY

In attempting to estimate the part that forestry will play in tackling climate change, a question arises as to how much reliance should be placed on such top-down estimates of forests’ potential to mitigate climate change as those above. These models do not generally address barriers to implementation such as transaction costs, adherence to rules of forestry programs and, importantly, political and financial risks. Bottom-up studies take more account of impediments and costs at the local level, and global estimates based on them produce far more conservative estimates. The IPCC summarized bottom-up studies and reported a mean estimate of global potential of 2.75 Gt CO2e, compared with 13.78 Gt in top-down studies (see Figure 1.6). This great disparity in the estimates of potential suggests that a deeper examination of the constraints operating on forest conservation and the planting of new forests is warranted, particularly in tropical countries where most of the potential lies. The methodology behind the estimation of the price of CO2e necessary to induce forest conservation or establishment of new forests is the first issue addressed.

16 Gt CO2e per year

14 13.78

12 10 8 6 4 2

2.75

0 Bottom-up estimate of potential Source:

Top-down estimate of potential

Nabuurs et al. (2007: Table 9.7).

Figure 1.6

Global abatement potential estimates by bottom-up and topdown studies, at a price of 5 or < US$100 per tonne of CO2e, by 2030

Markets for carbon and potential of forestry offsets

1.6.1

29

The Opportunity Costs of Afforestation/reforestation

In land-rich countries such as Canada, Australia and the US, existing forests are generally under government control. Increases in afforestation and reforestation therefore need to take place on private land. But the question needs to be asked whether landowners would be willing to afforest or reforest in order to gain carbon credits. A study in western Canada by van Kooten et al. (2002) found that 23 per cent of farmers were not interested in planting trees under any circumstances. Conclusions were that tree planting on agricultural land cannot be justified solely on the basis of carbon uptake benefits. Non-market benefits of scenic diversity, increased wildlife habitat and water and soil conservation have a bearing on uptake (van Kooten and Eagle, 2005). The costs of forestry options for landowners in Australia are summarized in Box 1.6. The need for caution about estimating afforestation/reforestation responses to payments for carbon also extends to developing countries as illustrated by a single example. In a Panamanian study, low-income landowners were advised of the benefits of afforestation under CDM projects (Coomes et al., 2008). Landowners favored cattle over afforestation even though cattle were less profitable. Compared to cattle, the forestry asset was regarded as very illiquid. Other negative economic and risk factors of forestry included high establishment costs, high labor demands and production and price risks. The authors concluded that present prices for sequestered carbon under the CDM provide an insufficient incentive to establish plantations or to halt continued forest conversion for cattle raising.

1.7

SUMMARY AND CONCLUSIONS

The first part of the chapter illustrated how trading in emission allowances and the purchase of offsets, including forestry offsets, reduces the cost of compliance. There is also a voluntary market for forestry offsets, but these transactions do not enter official carbon balance sheets. Given a price on carbon, the potential for forests to contribute to climate change mitigation was reviewed. The deeper the cuts in global GHGs, the higher the price of allowances and the greater the role of forestry in providing offsets. While some estimates predict a very important contribution by forestry, mainly in tropical regions but also in the US, wide disparities were found in the literature between various estimates of this potential. A limited investigation at the country level suggests serious

30

Carbon sinks and climate change

BOX 1.6

THE PRICE OF CARBON AND FORESTRY OPTIONS IN TROPICAL AUSTRALIA

Australia has great reforestation and afforestation potential in terms of sequestration rates of carbon and it is also a low risk country (Benítez et al. 2007). Large areas of forests are already being established to meet the demand for voluntary offsets by investors aiming for carbon neutrality. However, the cost per tonne of emissions that are offset varies greatly, depending on factors such as whether the land is being reforested with the aim of biodiversity conservation or whether monocultures are being grown simply for their value as carbon offsets. The estimated costs of forestry offsets are also greatly influenced by whether the opportunity costs of growing trees are taken into account. In tropical northern Australia growing conditions are favorable and carbon sequestration rates are relatively high. Private landowners have the opportunity of changing land use from existing grazing or cropping activities to the establishment of forests to capture carbon credits. In a study of options for private landholders, Hunt (2008) found that the cost of carbon emissions offset varied from a low of US$13.00 per tonne of CO2e offset for a pine tree monoculture where there were no opportunity costs, to a high of US$265 per tonne where cattle grazing is displaced by mixed native species reforestation. The results illustrate the great variation in the cost of sequestered carbon, depending on opportunity costs and type of reforestation. In this particular case it would seem that at prices of around US$12 per tonne of CO2e, only reforestation in the form of monocultures might be profitable for landowners, the cost of reforestation of native forests being far higher than carbon credit payments. possible constraints on the implementation of forestry projects. It is important to be mindful of these restraints in Chapter 7, which deals with domestic forest policy and potential in selected developing countries and in Chapter 8, which examines the promise of reducing deforestation and forest degradation in the tropics.

Markets for carbon and potential of forestry offsets

31

Forestry has played a very limited role so far in mitigating climate change. For forestry to reach its potential it is essential not only that global mechanisms are in place that enable the demand for offsets to be met, but also that global cuts in emissions are sufficiently deep to generate a price for carbon that makes carbon sequestration profitable.

REFERENCES Aldy, J., S. Barrett and R. Stavins (2003), ‘Thirteen plus one: a comparison of global climate policy architectures’, Climate Policy, 3(4), 373–97. Babiker, M., A. Criqui, J. Ellerman, J. Reilly and L. Viguier (2003), ‘Assessing the impact of carbon tax differentiation in the European Union’, Environmental Modeling and Assessment, 8(3), 187–97. Benítez, P., I. McCallum, M. Obsersteiner and Y. Yamagata (2007), ‘Global potential for carbon sequestration: geographical distribution, country risk and policy implications’, Ecological Economics, 60, 572–83. Capoor, K. and P. Ambrosi (2008), State and Trends of the Carbon Market 2008, Washington, DC: The World Bank. Coomes, O., F. Grimard, C. Potvin and P. Sima (2008), ‘The fate of tropical forest: Carbon or cattle?’, Ecological Economics, 65(2), 207–12. Evolution Markets (2002), ‘Evolution markets, executive brief’, White Plains, NY: Evolution Markets, available at www.evomarkets.com. Evolution Markets (2008), ‘Carbon markets: evolution subscriptions’, 29 September, White Plains, NY: Evolution Markets, available at www.evomarkets.com. Gore, A. (2007), An Inconvenient Truth, DVD, Hollywood, CA: Paramount Pictures. Hunt, C. (2004), ‘Australia’s greenhouse policy’, Australasian Journal of Environmental Management, 11(2), 156–63. Hunt, C. (2008), ‘Economics and ecology of emerging markets and credits for biosequestered carbon on private land in tropical Australia’, Ecological Economics, 66, 309–18. IPCC (International Panel on Climate Change) (2007), ‘Impacts, adaptation and vulnerability’, Fourth assessment report: Working Group II Report, Cambridge, United Kingdom and New York: Cambridge University Press. McKinsey (2007a), A Cost Curve for Greenhouse Gas Reduction, New York: McKinsey. McKinsey (2007b), ‘Reducing US greenhouse gas emissions: how much at what cost’, New York: McKinsey Conference Board, McKinsey. Ministry for the Environment (2008), ‘Major design features of the emissions trading scheme’, Wellington, New Zealand: Ministry for the Environment. Nabuurs, G., O. Masera, K. Andrasko, P. Benitez-Ponce, R. Boer, M. Dutschke, E. Elsiddig, J. Ford-Robertson, P. Frumhoff, T. Karjalainen, O. Krankina, W. Kurz, M. Matsumoto, W. Oyhantcabal, N. Ravindranath, M. Sanz Sanchez and X. Zhang (2007), ‘Forestry’, in B. Metz, O. Davidson, P. Bosch, R. Dave and L. Meyer (eds), Climate Change 2007: Mitigation, Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on

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Climate Change, Cambridge, UK and New York: Cambridge University Press, pp. 541–84. Nordhaus, W. (2007), ‘The challenge of global warming: economic models and environmental policy’, New Haven, CT: Yale University. Point Carbon (2008), ‘Point Carbon news’, 1(3), 1–7. PRS (Political Risk Services) (2004), ‘The PRS group international county risk guide’, Table T2c: Composite risk forecasts, available at http://www.sage.wisc. edu/atlas/. Richards, K. and C. Stokes (2004), ‘A review of forest carbon sequestration studies: a dozen years of research’, Climatic Change, 63, 1–48. Sathaye, J., W. Makundi, L. Dale, P. Chan and K. Andrasko (2006), ‘GHG mitigation potential, costs and benefits in global forests: a dynamic partial equilibrium approach’, Energy Journal, 27, 127–62. Sohngen, B. and R. Sedjo (2006), ‘Carbon sequestration in global forests under different carbon price regimes’, Energy Journal, 27, 109–26. Stavins, R. and K. Richards (2005), ‘The cost of US forest-based carbon sequestration’, Arlington, VA: The Pew Centre. Stern, N. (2006), The Economics of Climate Change, Cambridge, UK: Cambridge University Press. Tol, R. (2007), ‘The social cost of carbon: trends, outliers and catastrophes’, Economics Discussion Papers, 2007-44, available at www.economicsejournal. org/economics/discussionpapers. UNEP (United Nations Environment Programme) Risoe, (2008), ‘CDM rulebook’, available at http://cdmrulebook.org. UNFCCC (United Nations Framework Convention on Climate Change) (1992), ‘United Nations Framework Convention on Climate Change’, available at http://unfccc.int/resource/docs/convkp/conveng.pdf. UFCCC (United Nations Framework Convention on Climate Change) (2002), ‘A guide to the climate change convention process’, Bonn: Climate Change Secretariat. UNFCCC (United Nations Framework Convention on Climate Change) (2008a), ‘About the Clean Development Mechanism’, available at http://cdm.unfccc.int/ about/index.html. UNFCCC (United Nations Framework Convention on Climate Change) (2008b), ‘Marrakesh Accords and Cop 7’, available at http://unfccc.int/methods_and_ science/lulucf/items/3063.php. United Nations (1998), ‘Kyoto Protocol to the United Nations Framework Convention on Climate Change’, New York: United Nations. USEPA (United States Environmental Protection Agency) (2005), ‘Greenhouse gas mitigation potential in US forestry and agriculture’, Washington, DC: USEPA. van Kooten, G. and A. Eagle (2005), ‘Forest carbon sinks: a temporary and costly alternative to reducing emissions for climate change mitigation’, in S. Kant and R. Berry (eds), Institutions, Sustainability and Natural Resources: Institutions for Sustainable Forest Management, Netherlands: Springer, pp. 233–55. van Kooten, G., S. Shaikh and P. Suchánek (2002), ‘Mitigating climate change by planting trees: the transaction cost trap’, Land Economics, 78, 559–72. van Kooten, G., A. Eagle, J. Manley and T. Smolak (2004), ‘How costly are carbon offsets? A meta-analysis of carbon forest sinks’, Environmental Science and Policy, 7, 239–51.

2.

Forestry in the Kyoto Protocol

The aim of the United National Framework Convention on Climate Change (UNFCCC) and all related agreements is to ‘[A]chieve, in accordance with the relevant provisions of the Convention, stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system’ (UNFCCC, 1992, Article 2). The atmosphere can be characterized as an unmanaged commons; unmanaged in a sense that for all of history, until the Kyoto Protocol (United Nations, 1998) under the UNFCCC entered into force in February 2005, there was no control over greenhouse gas emissions (GHGs) to the atmosphere. The UNFCCC was opened for signature at the Earth Summit in Rio de Janeiro in 1992, the signatories agreeing that the greater responsibility for reducing GHG emissions in the near term rested with the developed/ industrialized nations, listed in Annex I of the Convention (UNFCCC, 1992). The Kyoto Protocol to the UNFCCC was adopted at Conference of the Parties (COP) 3, in December 1997, in Kyoto. Most industrialized countries and some central European economies in transition (defined as Annex B countries) agreed to legally binding reductions in greenhouse gas emissions below 1990 levels by 2008–2012. The reduction commitment of each country is listed in Annex B of the Protocol (United Nations, 1998). The Protocol has immense significance in that it is recognition by most countries that there is no effective way to manage the global commons other than by capping global emissions. At the close of 2008 the US and Kazakhstan were the only signatory nations, of which there were 185, not to have ratified the protocol (UNFCCC, 2008a). As of January 2008, running through 2012, Annex B countries must record and reduce their greenhouse gas emissions in terms of carbon dioxide equivalent (CO2e), achieving a collective average of 5.2 percent below 1990 levels. (The six greenhouse gases covered by the Protocol that together constitute CO2e, being weighted according to their global warming potential, are listed in Appendix A of the Protocol.) The overall cut by Annex B countries corresponds to an average cut of some 15 percent below business-as-usual emissions in 2008. The global cap can be 33

34

Carbon sinks and climate change

tightened progressively to achieve future global targets of CO2e concentrations in the atmosphere. Under the UNFCCC all parties, industrialized and developing, are called upon to develop national inventories of greenhouse gas emissions by sources and by removals by sinks, according to the guidelines established by the Intergovernmental Panel on Climate Change (IPCC). The historical development of guidelines for the establishment of national inventories is covered by Schlamadinger et al. (2007a). The IPCC (2006) guidelines unify the guidelines previously provided separately for agriculture and land-use change and forestry. Under the Kyoto Protocol, assigned allocation units (AAUs), each of one tonne of CO2e, make up a country’s assigned amount of emissions. International emissions trading (Article 17) allows Annex B countries to sell their surplus AAUs, as measured against their Protocol target, to other Annex B countries that are in deficit. The price of an AAU is set in the market and depends on the severity of the cap on emissions. Most Annex B countries have emissions levels above their targets. They are thus in the market to purchase AAUs. Several Annex B countries, for example Russia and the Ukraine, have emissions below their target and these are in the market to sell their surplus reduction units.

2.1

THE ROLE OF FORESTRY IN COMPLYING WITH TARGETS

Separate rules for GHG emissions and removals from the atmosphere have been designed under the Kyoto Protocol for land use, land-use change and forestry (LULUCF) activities because of their unique characteristics. LULUCF can remove CO2 from the atmosphere but the removal can also be reversed to emit an equal amount. This contrasts with the reduction achieved by a cut in the use of fossil fuels, where the cut can be more confidently said to remain permanent. The removals and emissions of CO2 by forests may take place over many years, and moreover removals are difficult to measure compared with the instantaneous emissions from burning, or the saving of emissions from not burning, fossil fuels. It is mandatory for Annex I parties to account for removals by sinks ‘afforestation’ and ‘reforestation’ and for emissions by deforestation activities. Planting or natural regeneration of forests on land that did not contain forestry on 31 December 1989 is reforestation, and on land that has not contained forest for 50 years is afforestation (United Nations, 1998: Article 3.3). Removal units (RMUs), achieved by afforestation

Forestry in the Kyoto Protocol

35

and reforestation (A/R), are equal to 1 tonne of CO2e.3 Countries must credit or debit their assigned amounts during the first commitment period of 2008 to 2012 with any increase or decrease in carbon resulting from afforestation and reforestation (A/R) activities, while the recording of the increase from deforestation is optional. Additional LULUCF activities such as cropland management, grazing land management, revegetation and forest management may be accounted for voluntarily in the first commitment period, 2008–2012. The choice of activities, which must have occurred since the beginning of 1990, had to be made before the commencement of the commitment period (United Nations, 1998: Article 3.4). Once a party has elected to include any or all of these activities in its inventory, reporting is mandatory throughout the first commitment period.4

2.2

WEAKNESSES OF THE KYOTO PROTOCOL IN RELATION TO FORESTRY

The accounting reference base for emission reductions and emissions is not uniform for all activities. Those from afforestation, reforestation and forest management are measured in the commitment period and directly added or subtracted from a country’s assigned amounts. This is the socalled ‘gross–net’ accounting system (Schlamadinger, 2007b). However, deforestation is not accounted for consistently for all Annex I parties. Parties for which land-use change and forestry were a source of emissions in 1990 may include emissions from deforestation in the calculation of their assigned amount (Article 3.7). This is so-called ‘net–net’ accounting. An inflated 1990 emissions level delivers a higher assigned amount in the first commitment period. The importance of this variation in meeting targets is illustrated by the case of Australia. Table 2.1 shows how Australia is on target to meet its 2008–2012 commitment with the inclusion of LULUCF, while Figure 2.1 shows the change in Australia’s emission levels relative to comparable Annex B countries without LULUCF. Box 2.1 details the circumstances that enabled Australia to use clauses concerning forestry sinks to its advantage. Another anomaly exists with the accounting treatment of revegetation (net–net) compared with A/R (gross–net). The only difference is in definition, in that A/R results in a forest, while revegetation does not. The differing methodologies make project planning more difficult. A further anomaly exists where a country may elect to report revegetation but does not choose to report devegetation (Schlamadinger, 2007b).

36

Carbon sinks and climate change

Australia’s CO2e emissions by sector, 1990 and 2008–2012a

Table 2.1 Sector

Mt CO2e 1990

2008–2012

Stationary energy Transport Fugitive Industrial processes Agriculture Waste Land use, land-use change Forestry

196 62 29 25 88 18 136 0

304 88 37 38 93 15 44 221

Total

554

599

2008–2012 as % of 1990

108

Note: aProjections for 2008–2012 are made under Kyoto Protocol accounting rules. Australia’s target is 8% above 1990 levels i.e. a level of 108% in 2008–2012 compared with 100% in 1990. Source:

Commonwealth of Australia (2007).

United Kingdom European Union Japan United States Canada Australia –10

–5

0

5

10

15

20

25

30

35

% Source:

World Resources Institute (2008).

Figure 2.1

Change in emissions of CO2e, without land use, land-use change and forestry, 1990 to 1994

Accounting for carbon in harvested wood products has been the subject of controversy given that only the carbon pools on site are accounted for (that is, above and below-ground biomass, dead wood, litter and soils) while harvested wood is assumed to be immediately oxidized. There is therefore no incentive to increase the stock of carbon in harvested

Forestry in the Kyoto Protocol

BOX 2.1 HOW ACCOUNTING FOR FOREST CLEARING ENABLED AUSTRALIA TO BE ON ITS KYOTO TARGET In contrast to many Annex I countries, Australia is likely to meet its Kyoto target of an increase in emissions in 2008–2012 over and above 1990 levels of 108 percent. This achievement will come about not by the adoption by the Australian government of successful greenhouse abatement strategies but rather by the actions of the states of New South Wales and Queensland, which banned large-scale clearing of native vegetation on conservation grounds (Hunt, 2004). In most countries LUCF was a net sink, but in Australia a quarter of the country’s 1990 emissions were generated by land clearing. In the closing hours of the Kyoto negotiations, what became known as the ‘Australia clause’ was inserted, enabling countries for whom land-use change and forestry constituted a net source of greenhouse emissions to include them in the calculation of the 1990 baseline (Grubb et al., 1999). Inflating the 1990 base by such a measure made reaching its already generous target of an 8 percent increase (compared with an average reduction of 5.2 percent for all Annex I countries) in emissions by 2008–2012 much more achievable. In what was looked upon as ‘a sleight of hand’ by most participants at Kyoto, the Australian clause omitted ‘forestry’ (Grubb et al., 1999: 122). This meant that forest sinks were not included in the baseline calculations but would be included in 2008–2012 calculations. Australia has thus benefited on two fronts; first by being able to include 136 Mt of emissions in its 1990 baseline, which enabled it to emit a higher amount in its first commitment period, and second by claiming 21 Mt removals of emissions by its forestry sink since 1990. The increase in emissions from electricity generation and transport has been large. Without the inclusion of LUCF in the baseline and forestry as a sink, the percentage change in emissions 1990 to 2008–2012 would have been 138 percent, rather than 108 percent (Commonwealth of Australia, 2007).

37

38

Carbon sinks and climate change

products or to prevent a decrease. Nor does the present system account for the substitution by wood, steel, concrete or other GHG-intensive products. In the latter case, however, the GHG emissions are already accounted for in the production of steel, concrete and other materials, so that crediting a substitution would in fact be double-counting. The greatest anomaly in the Kyoto Protocol is the exclusion of deforestation in developing countries. Tropical forests lie mostly in developing countries, and their conversion to agriculture or logging is a major contributor to global GHG emissions. This anomaly arises because of the exemption of developing countries from caps on their emissions. The inclusion of forest degradation in developing countries in an accounting framework, as well as deforestation, would incorporate emissions from the traditional and widespread use of fuelwood and charcoal in developing countries.

2.3 2.3.1

GLOBAL MARKETS FOR CARBON AND THE KYOTO PROTOCOL Joint Implementation

Joint Implementation (JI) under the Kyoto Protocol allows projectlevel emissions trading between Annex B countries; trade is in Emission Reduction Units (ERUs), each equivalent to an AAU, which in turn is one tonne of CO2e. Under JI, annex B countries facing high abatement costs can pursue cheaper CO2e emission reduction projects in other Annex B countries. Most JI funding will probably flow from Japan and Western Europe, as such a pattern was observed during Activities Implemented Jointly, a precursor of JI. Private sector companies in Annex B countries may initiate JI transactions which are recorded against a country’s Assigned Amount of emissions. For example, if a country is 100 million tonnes above its emission target in 2010 it could initiate projects to generate a total of 100 million ERUs. Alternatively it could purchase a parcel of AAUs amounting to 100 million tonnes in the market. The choice will depend upon relative prices. 2.3.2

The Clean Development Mechanism

The other project-based mechanism that enables countries with high abatement costs to pursue projects in lower-cost countries is the Clean Development Mechanism (CDM) (Article 12). The CDM differs from JI in that A/R (afforestation/reforestation) projects are based in non-Annex

Forestry in the Kyoto Protocol

39

B countries. Again, private sector companies may structure transactions, or governments may play an active role by, for example, packaging internal projects and then managing the sale of certified emissions reductions (CERs), which again are equal to one tonne of CO2e. The CDM is specifically designed to advance the sustainable development goals of developing countries. It could be seen as a powerful potential tool for transferring new technologies to developing countries, and a requirement is that a proportion of project costs supports other projects that mitigate emissions in non-Annex B countries. To prevent the possibility that the CDM could develop an overwhelming level of credits which would undercut the aims of the Protocol to achieve mitigation in Annex B countries, a restraint (United Nations, 1998: Article 12) is that a project must generate reductions that would not otherwise have occurred. An important feature of the market for CERs under the CDM is that since year 2000 they have been able to be banked against the first commitment period, 2008–2012, and set against a country’s Kyoto Protocol target. CERs may be bought from developers by national governments that have a deficit of allowances, or they may be purchased by funds or individual entities. In practice the buyers can purchase these credits directly from another party with excess allowances or from a broker, from a JI/CDM developer, or an exchange. There is inter-country variation in the costs of meeting targets. It is unlikely that countries that face very high costs of meeting their targets would agree to caps without the inclusion of a mechanism that enabled them to purchase emissions from countries with lower costs of abatement. Emission trading schemes may be established as part of climate policy at the national level. Government-set emission caps on participating industries and companies may be able to meet their obligations by selling, buying and holding Kyoto Units, that is AAUs, CERs, ERUs, depending on the policies of individual countries (see Chapter 7 for in-country policies). Emission reductions that are attributable to an afforestation or reforestation (A/R) project activity (also known as net anthropogenic greenhouse gas removals by sinks) are calculated based on the following formula: Emission reductions 5 actual net greenhouse gas removals by sinks – baseline net greenhouse gas removals by sinks – leakage (UNEP Risoe, 2008a). (Leakage is where emissions are reduced in one place but lead to an increase elsewhere). There is a variation in the CDM to allow small-scale sink projects of less than 8 Kt CO2e per year that are developed or implemented by

40

Carbon sinks and climate change

low-income communities. Simplified modalities and procedures apply. Lower registration fees and allowing a single operational entity to carry out both validation and verification reduce transaction costs in small-scale project preparation, and may enable the participation of local communities (UNFCCC, 2008b).

2.4

THE ROAD TO THE CDM

In planning for arrangements post-Kyoto Protocol, that is after 2012, it is instructive to bear in mind how the CDM came to be adopted. When the inclusion of LULUCF in the Kyoto Protocol was agreed, there were no specific rules as to how removals and emissions by land use, land-use change and forestry (LULUCF) would be accounted for. The Protocol needed to be operationalized, and this was done through a series of conferences of the parties, or COPs. Höhne et al. (2007) provide a history of the negotiations that led to the adoption of rules for LUCF. Perhaps the most contentious single issue in negotiations of the Kyoto Protocol was the inclusion of forestry sinks. The earliest formal proposals to count forestry proposals towards emission limits were from the US and New Zealand. However, the ability to use sinks was seen by some countries as a potential loophole by which industrialized countries could postpone the implementation of domestic policies to reduce their greenhouse gas emissions; it would also result in the delay of the development of new technology. Issues of leakage, where emissions are reduced in one place but lead to an increase elsewhere, and of permanence, given the carbon sequestered in forests can easily be released back to the atmosphere, also loomed large. In contrast, the US and Latin American countries maintained that investment in the forest sector was important to halt deforestation and to diversify the income opportunities of local communities through reforestation (Boyd et al., 2008). Moreover, many forestry projects under Activities Implemented Jointly had already been tested (UNFCCC, 2002). It has been suggested that without the inclusion of sinks, the Kyoto Protocol would not have been successfully negotiated (Boyd et al., 2008). A special report by the International Panel on Climate Change (IPCC, 2000) provided definitions of terms and accounting rules for LULUCF activities. In 2001 the Marrakesh Accords finally decided on the inclusion of A/R in the CDM and in the commitment period 2008–2012, but avoided deforestation was excluded. Included in the agreements negotiated was that losses from LULUCF from several land-use types must be included in the commitments of Annex B countries, that is those subject to caps. Under Article 3.4 of the Kyoto Protocol and the Marrakesh Accords

Forestry in the Kyoto Protocol

41

of COP 7, countries may choose to account for carbon stock changes due to forest management (FM), cropland management, grazing land management (GM) or revegetation (RV). 2.4.1

Afforestation and Reforestations – the Only Options in the CDM

In the first commitment period the role of non-Annex B countries under the CDM has been limited to A/R. The Marrakesh Accords also placed limitations on the amount of credits claimable by Annex B Parties to 1 percent times 5 of their 1990 emissions (or 5 percent of their 1990 emissions for the period 2008–2012) (UNEP Risoe, 2008a; UNFCCC, 2006b). Under the CDM, A/R projects are restricted to those that would not have occurred without CDM financing and to areas that were not forested prior to 1990. Negotiations on how to treat sources and sinks in the CDM continued until rules governing sinks were finally agreed at COP 9, in Milan, in 2003. Meanwhile, Canada had proposed insurance and protected status for forestry projects to solve the permanence issue, while Colombia had proposed that carbon credits would expire when carbon is readmitted from the atmosphere. In the Colombian proposal the holding country would need to increase carbon emissions by that amount in its national inventory or buy the same number of credits from another forestry country (Boyd et al., 2008). In the end parties agreed, at COP 9, that forestry CERs would be either temporary (tCERs) or permanent (lCERs). TCERs cannot be carried over to the next commitment period and must be replaced at the end of five years. LCERs are for a maximum of 60 years and then need to be replaced by non-forestry CERs. When the certification report indicates a reversal since the last certification of net removals of CO2e by the lCER sink, an equivalent quantity of lCERs needs to be replaced. 2.4.2

Modeling the Kyoto Options for Forestry

For an explanation of the tortuousness and length of the negotiations over the inclusion of LULUCF in the CDM and its rules and modalities, we turn to Jung’s (2005) analysis of the economic and country-by-country impacts of the different policy options that were on the table. The activities that Jung interpreted as falling under the definitions of A/R under the Kyoto Protocol are as follows: ● ● ●

‘Regeneration’ 5 degraded lands to secondary forests; ‘Plantations’ 5 fast-growing commercial plantations; ‘Agroforestry’ 5 trees integrated in farmland and rangeland;

42

Carbon sinks and climate change ●

‘Avoided Deforestation’ 5 conservation of forest that would otherwise have been deforested.

From IPCC (2000), Jung obtained estimates of the carbon uptake factors for forests, weighted by the percentage of the forest type in each region. Estimates of carbon emissions saved through avoided deforestation were also obtained from the literature, as were the costs of carbon sequestration which were ordered as follows. The most expensive is regeneration, since regrowth is slower and there are less marketable benefits. Then follow plantations and agroforestry, which have high establishment costs but yield marketable benefits. Cost differences of regrowth projects between countries were calculated according to GDP per capita and carbon uptake rates. Costs for avoided deforestation were assumed to be determined by scarcity of arable land and the carbon uptake factors of the project activity in the country. Modeling was through the CERT model of the international Greenhouse Gas Trading Model. Transaction costs for carbon credits were set at $0.55/tCO2 for CDM projects and $0.27 for JI projects. The US participates to a small extent in the modeling, even though it failed to ratify the Kyoto Protocol, because of the level of interest in sequestration at state and company level. The results showed the effect of introducing forestry on the market price of CERs in the CDM and the extent to which Annex B countries would have used CERs to comply with their emission targets, as well as country-by-country distributional effects. If all forestry, including avoided deforestation, was included, the price of permits fell from $3.08 per tonne of CO2e (the price of permits in the international market without forestry) to $0.90. The price remained unchanged for this scenario with the cap. By excluding avoided deforestation, the market price increased to $2.43/t CO2e, as illustrated in Figure 2.2. The avoided deforestation potential alone would have fulfilled the reduction requirements of the Kyoto Protocol more than twice. This is because forestry projects were assumed to be cheaper than all energy projects. But the 1 percent cap binds, limiting the amount of forestry CERs to 725 Mt CO2e, or 45 percent of total reduction requirements. Where avoided deforestation was excluded, the results suggest that the crowding-out effect will not occur, as only 18.6 percent of reduction requirements are fulfilled by forestry CERs, allowing a larger role for energy projects (29–35.4 percent) and domestic abatements (22.2–24.7 percent) (see Table 2.2). The fears of the parties who opposed the inclusion of LULUCF in the CDM, on the grounds that it would crowd out mitigation projects and allow Annex B countries to forgo domestic GHG mitigation measures, are thus supported by the results. In the light of the results Jung (2005)

Forestry in the Kyoto Protocol

43

3.5

$ per tonne of CO2e

3.0

3.08

2.5 2.43 2.0 1.5 1.0 0.5

0.9

0.9

R, P, AG, AD

R, P, AG, AD 1% CAP

0 W/o LULUCF

R, P, AG

Notes: R5Regeneration, P5Plantations, AG5Agroforestry, AD5avoided deforestation, 1% CAP 5 the proportion of 1990 emissions claimable by these activities by Annex I countries. Source:

Jung (2005).

Figure 2.2

Table 2.2

Price per tonne of CO2e in world markets with and without forestry in the CDM The percentage of reduction requirements met by land use and land-use change in the Clean Development Mechanism CERs sold

Scenario Without LULUCF Ra,Pb,AGc,ADd R,P,AG,AD 1% CAPe R,P,AG

Forestry CERs

Energy CERs

Total CERs

0 61.4 44.8 18.6

43 0 16.5 29

43 61.4 61.4 47.6

Russia and Eastern Europef

Domestic abatement

30.2 30.2 30.2 30.2

26.8 8.4 8.4 22.2

Notes: a R5regeneration b P5Plantations c AG5Agroforestry d AD5avoided deforestation e 1% CAP is the proportion of 1990 emissions claimable by these activities by Annex I countries. f The ease with which these countries can meet their Kyoto Protocol targets is expected to lead to a supply of low-priced credits. Source:

Jung (2005).

44

Carbon sinks and climate change

reviewed the positions taken during LULUCF negotiations by different countries. In a number of instances the country positions were in sympathy with their profits and losses expected with LULUCF inclusion. 2.4.3

Country Negotiating Positions Explained

From the beginning of negotiations the US, Japan, Australia, Canada, New Zealand and Norway were the main proponents of LULUCF. The results suggest that their proactive position was driven by the prospect of lowering their compliance costs. The failure of the EU to support forestry’s inclusion can be explained by the fact that it wanted to display a leadership role in terms of the perceived problems of LULUCF, together with a lack of strong interest groups lobbying for its inclusion.5 The resistance of Eastern European countries and Russia is explained by fear that the inclusion of LULUCF would devalue the credits that they were left with after their caps under the Kyoto Protocol exceeded their current emissions. China, along with the G77 (a coalition of developing countries) opposed the US proposal by raising concerns that a wide inclusion of sinks would enable Annex I countries to comply without making any mitigation effort (Boyd et al., 2008). But China has a massive potential to gain from energy projects and would be a clear loser if these were crowded out by cheaper forestry projects. The opposition by Brazil, even though set to gain from inclusion, is explained by the sovereignty implications of large foreign investment in forestry. Jung’s (2005) analysis suggested a very small role for LULUCF in the CDM given the existence of the cap and the exclusion of deforestation avoided. This prediction has been borne out, as at November 2008 only one forestry project had been registered under the CDM whereas 1190 projects in total had been registered (UNEP Risoe, 2008b). Apart from the high transaction costs, a factor that would undoubtedly play a major part in the tardy development of forestry projects is that carbon sequestration is slow in the first few years after forest establishment. 2.4.4

Late Start Works against Forestry Projects

While CDM projects could accumulate credits from year 2000, basic rules governing forestry were not resolved until the end of 2003, which makes the implementation of projects before the end of 2005 unlikely given the long lead times for project development and registration. Even by the end of the first reporting period in 2012, that is, six years after planting in the beginning of 2006, only a fraction of the potential removal of CO2e by a forest will have been achieved (see Figure 2.3). The modest level of

Forestry in the Kyoto Protocol

45

800

Tonnes of CO2e removed

700 600 500

2012 is end of first commitment period

afforestation project established 2006

400 cumultive CO2 removed per hectare

300 200 100 0 1990 –100

2000

2010

2020

2030

2040

Calendar year Note: The sequestration profile of a plantation in tropical north Queensland, Australia shows that in the very early years CO2 removal is slow, and the average over the 6 years 2006 to 2012 is 14 tonnes per hectare. Thus only a small amount of a forest’s potential to remove CO2 is manifest by the end of the first commitment period in 2012. The profile is developed using the Carbon Toolbox of the Australian Government (2007).

Figure 2.3

Removal of tonnes of atmospheric CO2 per hectare by tropical forest plantation established in year 2006

credits generated after only six years means that the cost per tonne of CO2e removed is likely to be high (given the transaction costs involved) compared with mitigation projects. A further deterrent to the establishment of A/R projects under the CDM is that credits are not bankable and there is no guarantee that credits generated post-2012 will be saleable post-2012.

2.5

FORESTRY PROJECTS IN THE CDM PIPELINE

At the end of 2008, only one project had been registered but no CERs had been issued. A/R projects in the validation stage numbered 35 (one project has reached the registration stage and emerged from the pipeline) and 14 of these were small-scale projects. Of the large-scale projects 15 were in Asia/Pacific, nine in Latin America, nine in Africa and two in Europe. Not all projects have buyers, the World Bank being the most important so far (see Table 2.3). Table 2.4 shows that A/R projects are of minor importance compared with other types of CDM projects, contributing less than 1 per cent to the number of projects in the UNFCCC pipeline. The expected contribution of those projects is only 0.4 percent of CERs by the end of the first

46

Carbon sinks and climate change

Table 2.3

Buyers of afforestation and reforestation projects in the CDM, including small-scale projects, November 2008 Afforestation

Reforestation

World Bank BioCarbon Fund, World Bank Other No funding

1 0 1 3

5 7 15 14

Total in CDM pipeline

5

41

Source:

UNEP Risoe (2008b).

commitment period in 2012 when they will be registered and set against Annex I country emissions. A somewhat different picture emerges from an analysis by EcoSecurities of A/R projects (Neeff et al., 2007). EcoSecurities was by far the largest company buying CERs and it was therefore in a position to look further back in the pipeline. In 2007 there were an estimated 50 to 70 A/R projects under development. A majority of the projects were in Latin America, a quarter were in Africa and a small number were in Eastern Europe and south-east Asia. Of the projects, 30 were capable of detailed analysis: two-thirds of the projects were long-term (lCERs) and a third short-term (tCERs), and a typical project covered 6000 to 8000 hectares. Most projects estimated a credit generation potential in terms of CO2e of 15 tonnes, per hectare, per year by 2012. This expectation is in line with the estimate of an average of 14 tonnes made for an A/R project, established in 2006, by 2012, in Figure 2.2 above. However, 15 percent of projects estimated credit potential averaging over 20 tonnes per year by 2012, a level that it is suggested by Neeff et al. (2007: 4) is erroneously based on linear tree growth rates; these projects may not therefore survive the scrutiny of the Executive Board of the CDM.6 At the end of 2008 there were 179 projects in the JI pipeline but there were no JI forestry projects (UNEP, Risoe, 2008b).

2.6

THE FORESTRY PROJECT CYCLE UNDER THE CDM

An examination of the project cycle for forestry projects under the CDM throws light on the complexity of the process, its cost and the long gestation period necessary. The cycle is detailed in Figure 2.4.

Forestry in the Kyoto Protocol

Table 2.4

Certified Emission Reductions under the Clean Development Mechanism, in the pipeline at November 2008 and expected by 2012, by type of offset

Types of CDM projects

Afforestation Agriculture Biogas Biomass energy Cement CO2 capture Coal bed/mine methane Energy distribution EE households EE industry EE own generation EE service EE supply side Fossil fuel switch Fugitive Geothermal HFCs Hydro Landfill gas N2O PFCs Reforestation Solar Tidal Transport Wind Total Note: Source:

2.6.1

47

Number in pipeline

% of total

Total expected CERs in 2012 ’000

% of total

5 226 267 632 38 1 61 4 12 172 375 10 46 135 29 13 22 1098 302 65 8 29 24 1 8 568 4151

0.1% 5.4% 6.4% 15.2% 0.9% 0.0% 1.5% 0.1% 0.3% 4.1% 9.0% 0.2% 1.1% 3.3% 0.7% 0.3% 0.5% 26.5% 7.3% 1.6% 0.2% 0.7% 0.6% 0.0% 0.2% 13.7% 100%

1864 51531 61578 200089 41342 29 130644 1045 3739 32916 272523 672 34933 204275 63733 13761 493898 471825 256959 258450 4785 9122 2990 1104 4002 220299 2838107

0.1% 1.8% 2.2% 7.1% 1.5% 0.0% 4.6% 0.0% 0.1% 1.2% 9.6% 0.0% 1.2% 7.2% 2.2% 0.5% 17.4% 16.6% 9.1% 9.1% 0.2% 0.3% 0.1% 0.0% 0.1% 7.8% 100%

Afforestation and Reforestation (excluding small-scale projects) are highlighted. UNEP Risoe (2008b).

Steps in the Cycle

Project design documents (PDDs) contain the key information on the potential for removal of CO2e, against an approved, or developed for

48

Carbon sinks and climate change

Project concept

Host country issues letter of endorsement

Buyer issues letter of intention to purchase CERs

Project design document (PDD) and Monitoring and Verification plan $60,000–$180,000

Designated National Authority (DNA) of host country issues Letter of Approval (LoA)

Binding Emission Reduction Purchase Agreement (ERPA)

PDD validated by Designated Operational Entity (DOE) $15,000–$25,000

Registration by CDM Executive Board (EB) $8,500

Monitoring by project developer $varies

Verification by DOE of PDD, Implementation and Monitoring $15,000–$25,000

Certification of Verification by DOE $cost included in Verification costs

CERs issued by CDM EB 2% of CERs retained by EB Source:

After Neeff et al. (2007: Figure 1).

Figure 2.4

The forestry project cycle in the CDM

Forestry in the Kyoto Protocol

49

approval, scientific baseline methodology. Environmental and socioeconomic impacts, together with local stakeholder comments, are also required. An Emission Reduction Purchase Agreement can be signed at any stage, but an early agreement is necessary if the project requires seed capital. The Designated Operating Entity (DOE) must be in possession of a Letter of Approval (LoA) from the host country’s Designated National Authority (DNA) before it can validate the project. Host country approval and project validation by the DOE often proceed in tandem. A list of DOEs can be found in UNEP Risoe (2008b). Validation is required of the following: ● ● ● ●

methodology and its application to establishing a baseline; sustainable development objectives; that CO2e removals every five years do not coincide with peaks before harvesting in the case of plantations; that non-permanence is addressed.

The PDD is made public on the Internet and comments are received for 45 days before the DOE validates the project. The validation report and PDD are submitted to the Executive Board (EB) for Registration. Monitoring needs to be conducted according to the project’s Monitoring Plan. It provides data on the biomass through tree growth and losses from thinning, pruning and harvesting. Verification is an audit every five years by a DOE (except for the first verification which is decided by the proponent) different from the validating DOE of monitoring and project implementation, demonstrating that: ● ● ●

implementation is according to PDD; carbon claims are based on approved baseline and monitoring calculation procedures; sustainable development indicators meet the project targets.

The Verification report is submitted to the EB and made public. Certification follows, which is a statement of CERs generated in accordance with the rules of the Kyoto Protocol. Finally, the EB issues the CERs (unless the EB decides to review the project), less 2 percent, which goes towards an adaptation fund for countries most affected by climate change.

50

Carbon sinks and climate change

2.7

COSTS AND FUNDING OF FORESTRY CDM PROJECT DEVELOPMENT

Cost ranges for steps in a project identified in Figure 2.4 total between $100 000 and $250 000. Costs need to be met long before the project generates CERs, which could take two years (UNEP Risoe, 2008a). Larger projects achieve economies of scale, while small-scale projects of less than 8000 CERs per year are presented with slightly fewer administrative hurdles. The first projects in the CDM forestry project pipeline have been promoted and funded mainly by the World Bank through its BioCarbon Fund (see Table 2.3 and Box 2.2) and large NGOs, whose aim is to fund rural development activities with multiple environmental and socioeconomic benefits. Using the first tranche of $53.8m from the BioCarbon Fund, The World Bank has already signed several ERPAs. In fact the main buyer of forestry CERs is the World Bank, with a fixed price of around $4.00. At

BOX 2.2

FINANCING FORESTRY PROJECTS UNDER THE CDM: THE BIOCARBON FUND OF THE WORLD BANK

Since 2004 the BioCarbon Fund has supported the development of marketable LULUCF projects under the CDM that deliver benefits to poor areas likely to suffer the greatest impacts from climate change and that protect and enhance local and global environments. A first tranche raised $53.8 million from governments and private enterprise. The application of this fund is expected to result in 19 emission reduction purchase agreements. A large proportion (37 percent) of these are in sub-Saharan Africa, in contrast to the carbon market as a whole to which Africa contributed only 3 percent of transactions (BioCarbon Fund, 2008). The BioCarbon Fund has been at the cutting edge of development of methodologies which are now in the public domain. Importantly, it has also shown with purchase agreements how projects can be implemented with concrete results. Moreover, the Fund has developed methodologies for activities not covered by the CDM such as avoided deforestation, and is exploring and piloting forest management, sustainable agriculture and revegetation activities. Such experience will be invaluable in the postKyoto negotiations centering on expanded rules for forestry.

Forestry in the Kyoto Protocol

51

the end of 2008 there was no competition from other buyers in the markets for forestry CERs, and the price remained static.

2.8

MODALITIES AND PROCEDURES FOR AFFORESTATION AND REFORESTATION UNDER THE CDM

Unlike abatement measures that prevent the release of CO2e to the atmosphere, there is a risk that carbon storage in forestry projects will be released back into the atmosphere at any stage of the project, thus reversing the climate benefit achieved. This can occur deliberately through harvesting or inadvertently through fire, pests or unlawful clearing. The type of CER chosen in developing A/R projects under the CDM, whether temporary (tCER) or long-term (lCER) (UNFCCC, 2004), must remain fixed for the project’s duration, including project renewal. These CERs, each equal to one tonne of CO2e removed, may be used by an Annex B country for achieving compliance with its cap in the commitment period in which they are issued. The possibility of reversal is taken account of in the CDM by rules that A/R projects must be verified and CERs replaced at project expiry. TCERs expire at the end of the commitment period for which they were issued and must be replaced either by other tCERs or other Kyoto Units (AAUs, RMUs, ERUs, CERs) (see note 2). The crediting period for lCERs can be carried over to subsequent commitment periods, having a duration of 20 years with two renewal periods possible for a total of 60 years to expiry. At their expiry, at the end of the commitment period for which they were issued, lCERs they must be replaced by other Kyoto Units (CERs, AAUs, ERUs, RMUs) but not by other lCERs (UNEP Risoe, 2008a). The quantity of CERs issued in each period is the verified cumulative tonnes of CO2e removed above baseline. The timing of the first verification is optional but thereafter is fixed at fiveyear intervals: see Figure 2.5a. The quantity of lCERs issued is the tonnes of CO2e removed since the verification five years previously: see Figure 2.5b. The procedures for dealing with losses and harvesting in tCERs and lCERs in A/R are illustrated in Figures 2.5c, 2.5d and 2.5e. The cost involved in replacement means that forestry credits will always be lower in price than non-expiring credits of AAUs, RMUs, ERUs, and CERs. The next section deals with the valuation of temporary CERs and the choices facing developers.

52

Carbon sinks and climate change 0.8 Crediting period

0.7

Units of net CO2e

0.6 0.5 0.4 0.3 0.2 0.1 0 –0.1

R

V1

V2

V3

V4 E

Commitment periods of 5 years Notes: TCERs expire at the end of the commitment period for which they were issued. The timing of the first verification is optional but thereafter verification must be at 5-year intervals. R 5 Project Registration V1–V4 5 Project Verification E 5 Project end … 5 Quantity of tCERs „ 5 Lifetime of tCERs Source: After Locatelli and Pedroni (2006: Figure 3).

Figure 2.5a

2.9

Temporary CERs (tCERs ) in afforestation and reforestation

ISSUES IN THE COMMERCIALIZATION OF CARBON CREDITS IN FORESTRY

A crucial choice facing developers commercializing A/R projects under the CDM is whether to sell tCERs or long-term lCERs, and how to deal with risk. 2.9.1

Developers’ Choice Between tCERs and lCERs

Temporary CERs are issued for five-year periods. As the forest grows, each five-year period will yield more CERs, except where there is a fluctuation in sequestered carbon due to harvest or other factors. No liability is

Forestry in the Kyoto Protocol

53

0.8 Crediting period

0.7

Units of net CO2e

0.6 0.5 0.4 0.3 0.2 0.1 0.0 –0.1

R

V1

V2

V3

V4 E

Commitment periods of 5 years Notes: LCERs expire at the end of the crediting period and must be replaced. R 5 Project Registration V1–V4 5 Project Verification E 5 Project end … 5 Quantity of lCERs „ 5 Lifetime of lCERs Source:

After Locatelli and Pedroni (2006: Figure 3).

Figure 2.5b

Long-term CERs (lCERs) in afforestation and reforestation

incurred by the fluctuation as the next five-year period simply yields fewer CERs (Figure 2.5a). In contrast, long-term CERs are valid for the whole length of the project, which is a maximum of 60 years. Only the increment since the last verification is credited and losses must be made good. In a 20-year project at year 5, the credits will have a validity of 15 years. At year 10 they will be valid for 10 years, and so on, until expiry (Figure 2.5b). For an investor, the purchase of expiring credits (either tCERs or lCERs) is equivalent to postponing compliance with reduction obligations to a future commitment period. The choice facing the investor is to buy permanent credits or temporary forestry credits. Forestry credits will be preferred if their purchase price plus their future replacement price is less than for permanent credits. The replacement cost depends on the future

54

Carbon sinks and climate change 0.4

Units of net CO2e

0.3

0.2

0.1

0.0 R

V1

V2

V3

V4 E

–0.1 Notes: Verifications must not coincide with peaks before harvesting. Harvesting reduces the quantity of CERs issued. R 5 Project Registration V1–V4 5 Project Verification E 5 Project end … 5 Quantity of tCERs „ 5 Lifetime of tCERs Source:

Author’s design.

Figure 2.5c

Temporary CERs with harvesting in afforestation and reforestation

price of credits and the discount rate applied to that future estimated cost by the purchaser. The relative price of an expiring credit will increase, the longer the time period and the higher the discount rate, because these two factors together reduce the replacement cost. The cost of replacing a five-year expiring credit will only be marginally lower than the present cost of a permanent credit, and this difference will determine what investors are prepared to pay. Assuming an investor’s discount rate is 4 percent, and that relative prices do not change in the future, it is possible to compare the value or price of temporary credits of different lengths against the value or price of permanent credits, as in Figure 2.6. For example, if the price of permanent credits is $10 then the comparable price for temporary 5-year credits is $1.80 and for 25-year credits $6.30, at a 4 percent discount rate. A question remains as to how the decision to invest in expiring credits will be affected if the investor expects replacement credits to rise or fall in

Forestry in the Kyoto Protocol

55

0.4

Units of net CO2e

0.3

0.2

0.1

0.0 R

V1

V2

V3

V4 E

–0.1 Notes: The seller is required to replace lCERs lost during harvesting. R 5 Project Registration V1–V4 5 Project Verification E 5 Project end … 5 Quantity of lCERs „ 5 Lifetime of lCERs Source:

Author’s design.

Figure 2.5d

Long-term CERs with harvesting in afforestation and reforestation

the future due to demand rising or falling relative to supply. This may be answered by reasoning that the replacement cost will rise at expiry if prices rise, making expiring credits less valuable. On the other hand, a fall in the price of replacement credits makes replacement cheaper and increases the relative value of temporary credits (Bird et al., 2004). If in practice the increase in prices over time is in excess of the investor’s discount rate then the future replacement price of expiring credits is greater than their purchase cost and a loss will have been made on the investment, as pointed out by Olschewski and Benítez (2005). Other risks involved in investing in temporary forestry credits are now discussed. 2.9.2

Financial Risks in CDM Forest Project Development

Carbon credits may provide the extra returns needed to make A/R projects profitable. This is illustrated in a list of draft PDDs provided by Neeff and

56

Carbon sinks and climate change 0.4

Units of net CO2e

0.3

Retired lCERs

0.2

0.1

0 R

V1

V2

V3

V4 E

–0.1 Notes: The seller may choose to forego the sale (retire) lCERs to avoid their replacement after harvest. R 5 Project Registration V1–V4 5 Project Verification E 5 Project end … 5 Quantity of lCERs „ 5 Lifetime of lCERs Source:

Bird et al. (2004), Figure 2.4.

Figure 2.5e

Alternative long-term CERs with harvesting in afforestation and reforestation

Henders (2007), showing the internal rates of return of projects with and without CERs. It is, however, noticeable that some of these projects are expecting CER prices well in excess of present market rate of around $3.00 to $4.00. The profits in forestry credits may be reduced by the costs of delivering social and environmental benefits required by CDM projects. Long delays in income generation and high costs of establishment characterize forestry projects. Markets can fluctuate, adding to uncertainties surrounding financial yield. Rates of return can be lower than in other industrial sectors. Moreover, the validation of removal of CO2e and the need to replace losses and project CERs at expiry (as discussed above) also incur costs and risks (Neeff and Henders, 2007). There are several methodologies available for large-scale forestry but the monitoring process in A/R projects is highly complex and may delay or even prevent projects from issuing CERs. Their complexity is illustrated

%

Forestry in the Kyoto Protocol 100 90 80 70 60 50 40 30 20 10 0

57

88

91

83

86

79

30 35 40 Years to expiry

45

50

55

60

69

75

63 54 44 32 18 5

10

15

20

25

Note: Expiring credits need to be replaced either at 5-yearly intervals in the case of tCERs or at project expiry in the case of lCERs. At a 4% discount rate and assuming that the prices of credits do not change, a tCER with a fixed period of 5 years is worth 18% of a permanent CER. An lCER with a validity period of 60 years is worth 91% of a CER. The more that a replacement is delayed, the closer the expiring credit price is to the permanent credit price.

Figure 2.6

Percentage value of an expiring credit relative to permanent credit at 5-year intervals from the present, at constant prices

by the case of a methodology that includes 134 equations in 103 pages of text (Neeff et al., 2007). After negotiating the steps in the project cycle (see Figure 2.3), most A/R projects are expected to be subject to the final verification that takes place after certification towards the end of the first commitment period in 2012. There is a risk that there may not be time to correct project deficiencies in time for verification, for example in data that has been collected over previous years (Neeff et al., 2007). The process towards registration of A/R projects under the CDM requires specialized and often expensive advice from international consultants. To achieve registration of projects, up-front investment is needed to cover transaction costs, which tend to be higher than for most emission reduction projects. These risks are exacerbated by the uncertainty surrounding the arrangements for generating carbon credits from forestry projects after the expiry of the Kyoto Protocol in 2012.

2.10

SMALL-SCALE FORESTRY PROJECTS UNDER THE CDM

Two basic reasons justify the introduction of small-scale projects: transaction costs and equity. Small projects are unlikely to pay the modalities and

58

Carbon sinks and climate change

procedures (M&P) costs associated with project development, and some low-income countries’ participation in A/R is limited. While simplified procedures may be applied to small-scale projects of less than 8Kt of CO2e, no specific procedure for assessment of proposed new small-scale afforestation and reforestation methodologies had, at the close of 2008, been outlined by the Executive Board (UNEP Risoe, 2008a). New methodologies need to be submitted that simplify M&P and thus cut the costs of small-scale projects. But a downside is that such reduction in costs is likely to put in jeopardy the environmental integrity of projects. Locatelli and Pedroni (2006) showed that even with a reduction in M&P costs to 80 percent below those for large-scale A/R projects, the probability of small-scale projects becoming viable is small. The carbon accounting procedures adopted, that is, tCERs or lCERs, had little effect on viability, but an increase in price of credits might increase participation rates. At the time of writing there were only 14 small-scale AR projects in the CDM pipeline (UNEP Risoe, 2008b), suggesting that small-scale projects may not fulfill their expectations.

2.11

CASE STUDY: FACILITATING REFORESTATION FOR GUANGXI WATERSHED MANAGEMENT IN THE PEARL RIVER BASIN

To illustrate the benefits and costs associated with CDM projects, a case study is presented of the first A/R CDM project to be registered by the UNFCCC. The source of the material that follows is the Project Design Document, available online (UNFCCC, 2008c). 2.11.1

Outline of Project

The project is located in Cangwa County, which has a sub-tropical monsoon climate, and Huanjiang County with a cooler transitional monsoon climate, both of the Guangxi Zhuang Autonomous Region, in southern China. The project area is surrounded by dense human settlement: ten townships and 27 villages are involved in the project. The original forested lands have been severely degraded and are now barren, of low productivity and continue to degrade. The area has suffered large-scale deforestation since 1950, has been overused for fuelwood, overgrazed and is subject to frequent fire. Even though cattle grazing has ceased, the forest would not regenerate naturally because seed sources are some distance away; in any case seedlings suffer severe competition from grasses.

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Local farmers and communities would not be able to implement such a project without the forestry CER revenues generated, given the investment and technical barriers and market risks involved in plantation forestry. Projects may choose to account for one or more carbon pools. A conservative approach is taken in this project by accounting only for aboveground and below-ground carbon, ignoring carbon in dead wood, litter and soil organic carbon. The carbon in pre-existing vegetation is deducted from the carbon stock at project commencement. The baseline methodology adopted (AR-AM0001/version 02) was developed by the Chinese Academy of Forestry, private consultants, both internal and external, and the World Bank. Biomass estimation is by growth models. The crediting period for tCERs is 30 years and the total removal of CO2e by the forestry sinks at year 30 will be 773 842 tonnes, or an average of 25 795 tonnes per year. The leakage of emissions is low given the involvement of local labor and the limited burning of fossil fuels by the project. A National Park borders the project area in Cangwu County and a new park will be established in the project area. The region is one of the richest in terms of plant diversity in China but few protected flora and fauna species are presently found within the project boundary. 2.11.2

Land Tenure and Contractual Arrangements

The total land area of the project is 4000 hectares. Of this, 3000 hectares will be become public land under the control of villages, while the remaining 1000 hectares will be contracted to local farmers for 100 years. The communities and farmers will own the timber and non-wood products and are licensed to harvest the products for sale. Proceeds are subject to a central government 2 percent tax on transfer value. 2.11.3

Species for Reforestation

A mixture of species reduces the risk of fire, pests and diseases. Resin will be collected from Pinus massoniana from 16 years. Liquidambar formosana and Schima superba will be harvested at around 17 years and replanted, while Quercus and Eucalyptus spp. will be harvested at around 10 and 7 years respectively, and will regenerate naturally. 2.11.4

Key Financial Arrangements

With forestry alone, without CERs, the project generates an internal rate of return (IRR) of 8.53 percent, which is lower than the rate of return

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required for projects by the Chinese government. The application of the additionality test indicates a substantial increase in the IRR with CERs to between 13 percent and 17 percent, even after sensitivity analysis with lower output and prices and increases in costs. Investment is facilitated by the decision of the Chinese government that any sponsor may invest in and implement a CDM project. A significant barrier to investment in forestry by local villages and farmers is the long lead time between planting trees and receiving income from timber harvesting and non-timber products, together with the uncertainty of future timber prices and high transport costs. Carbon credits, at a guaranteed price of $4 per tonne of CO2e purchased by the BioCarbon Fund, will begin to flow four years after the inception of the project. Commercial banks and the Chinese government are willing to commit funds, given the increased income potential and certainty. Four private forestry companies are interested in investing in the project, given that they would share in the income from the sale of CERs and timber and non-timber products. 2.11.5

Environmental Impacts of the Project

Other environmental benefits claimed are reduced soil erosion and the regulation of hydrological flows in the watershed, improving soil health and contributing to climate stabilization. Importantly the project will act as a demonstration to other areas; plowing, which results in severe soil erosion, is avoided by establishing trees manually, and careful control of fertilizers and insecticide use minimize threats to downstream water quality. (The biodiversity benefits of this project, and of A/R projects generally, are reviewed in some detail in Chapter 4.) 2.11.6

Socioeconomic Impacts

The project is estimated to generate $21 million over the crediting period, benefiting about 5000 households (including six ethnic minority groups) through temporary employment in forestry operation and creating about 40 full-time jobs. The average annual net income per capita without the project in 2004 was $142; the project is expected to lift this by $34. Local forest agencies and companies will organize the training for local communities; this was cited by farmers and communities themselves as a major benefit along with employment opportunities, income increase and improvement in local environments.

Forestry in the Kyoto Protocol

2.12

61

DISCUSSION OF FUTURE ARRANGEMENTS FOR LAND-USE, LAND USE CHANGE AND FORESTRY IN A POST-2012 PROTOCOL

Having reviewed the contribution of forestry under the Kyoto Protocol, its successor’s role is now debated. While Annex I countries are bound to account for afforestation, reforestation and deforestation that have occurred since 1990, few countries have adopted cap and trade schemes that put a price on carbon while at the same time allowing forestry offsets to reduce the costs of meeting the cap. The EU ETS, by far the world’s largest attempt to cut GHG emissions, specifically rules out land-use change and forestry in reducing compliance. The continued opposition to the incorporation of LULUCF by EU ETS presently, as well as after 2012, has been a dampener on the role of forestry. The European Union (Europa, 2008) cites the liability risks created by the temporary and reversible nature of forestry to member states in covering a company-based trading system. The EU is also unhappy about the veracity of LULUCF monitoring and reporting, and the effect on the transparency and simplicity of incorporating LULUCF in its ETS. ‘Moreover, the sheer quantity of potential credits entering the system could undermine the functioning of the carbon market unless their role were limited, in which case their potential benefits would become marginal’ (Europa, 2008: Para. 23). The potential for forestry to contribute to climate change mitigation (as detailed in Chapter 1), by forest management as well as A/R, will remain unrealized until the introduction of cap and trade schemes by countries with potential for carbon sequestration. Forestry is set to play a large future role, and possibly a crucial one, in the domestic climate change policies of Australia, the US and New Zealand, and other countries with extensive land resources. 2.12.1

Should the Rules for Forestry under the CDM be Eased?

As for the CDM, this chapter has highlighted that while there are A/R projects in the pipeline that have not yet appeared in official statistics, the role of forestry is likely to be limited, compared with other offsets. Restraints in the form of conditions and rules have been necessary to generate confidence that CO2e removal by forestry sinks will actually take place and be permanent. But these have reduced the value of forestry CERs compared with other types of offsets. The high costs of generating low-value CERs by afforestation and reforestation under the CDM have meant that investment in projects and the purchase of CERs have been

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mainly by the World Bank, operating from a philanthropic stance rather than a commercial one. Calls for radical changes that loosen LULUCF rules under the Kyoto Protocol are misplaced. These rules have been developed to overcome the difficulties of measurement and of impermanence of sequestered carbon in forestry projects. Moreover, it should be noted by policy-makers that voluntary offsets, to achieve credibility in markets, are moving towards the adoption of the CDM’s LULUCF criteria (see Chapter 3 for the adoption of rules in the voluntary market). Rules have been slackened by the UNFCCC to allow small-scale A/R projects to lower their costs. It was shown above, however, that even with fewer rules, small-scale projects were unable to escape diseconomies of scale, so that their contribution is likely to remain extremely small. The question needs to be asked whether, in the process of extension of small-scale rules to medium-scale projects, the confidence in such projects would be compromised. As a way of increasing the role of LULUCF in the CDM, the BioCarbon Fund (2008) recommends the removal of the limit to use of LULUCF to 1 percent of 1990 emissions by Annex I countries. Above, under section 2.4.2 ‘Modeling the Kyoto options for forestry’, it was found that the relaxation of the 1 percent rule itself led to only a small reduction in price, but combined with the inclusion of avoided deforestation, could lower the global price of CO2e removals and crowd out other measures that abate emissions. Another suggestion by the BioCarbon Fund (2008) is to review the rule that mandates the replacement of all CDM LULUCF credits at the end of 60 years. The Fund argues that this rule creates a perverse incentive to harvest trees in order to be able to replace the credits; such an outcome negates the principle of trying to ensure the integrity of the afforestation and deforestation projects. This argument raises the issue of whether the permanence of A/R projects can be guaranteed for such an extended period, given the impermanence of institutions, governments and companies that were involved in making the undertaking at the outset. 2.12.2

Inclusion of REDD

Presently the LULUCF activities in the CDM are limited to afforestation and reforestation. The inclusion of reduced deforestation and forest degradation (REDD) in developing countries has a relatively large potential, compared with A/R, to contribute to the stabilization of greenhouse gases in the atmosphere. Major issues that need to be satisfactorily addressed are: how to deal with leakage (the prevention of deforestation might easily

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prompt deforestation elsewhere in the same country or in other countries); ensuring that payments are not made for avoiding deforestation when in fact deforestation would not have taken place; and whether including avoided deforestation projects under the CDM would not crowd out such measures by the host countries wishing to tackle deforestation themselves and to claim the benefits.7 The size of the contribution of forestry under relaxed rules and the inclusion of deforestation in developing countries is by no means certain: Chapter 1 showed that there is a wide disparity in estimates of forestry’s global potential. Moreover, further investigation at the country level in Chapter 1 found serious possible constraints to implementation of projects of an economic, social and political nature. Another unknown is the impact of the future participation of the US; its demand for credits from forestry projects in developing countries could increase substantially. Global problems such as climate change require global solutions. The contribution of forestry on a global scale to the mitigation of climate change has so far been very limited. Policies for the realization of the potential of forestry are taken up for developed countries in Chapter 7 and for developing countries in Chapter 8.

2.13

CONCLUSIONS

The rules for forestry in land use, land-use change and forestry and the Clean Development Mechanism (CDM) are generally soundly based and little is to be gained from revisiting them, except at the margin. While the anomalies are relatively minor in the whole scheme, they must nevertheless be guarded against in future arrangements. It needs to be accepted that the role of afforestation and deforestation in the CDM and the Joint Implementation (JI) may always be a minor one. The late start afforded afforestation and deforestation under the CDM has undoubtedly limited the number of projects in the pipeline; at the start of 2009 only one such project had been registered and no certified emission reductions had yet been issued. It is possible that the low-cost certified emission reductions by other types of project, that is the low hanging fruits, have been exploited and that the price of emission reductions will rise, making afforestation and reforestation relatively more competitive. Another factor that may induce a greater interest in forestry is an increase in the price of carbon after agreement on deeper cuts in global emissions at the Copenhagen climate change conference. On the evidence, however, the inherent characteristics of afforestation and reforestation will always be manifest in low prices, high costs and

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high risk projects, relative to other certified emission reductions, which are deterrents to private investors. The major deficiency of the CDM is omission of the reduction of deforestation and forest degradation (REDD) in developing countries. Here the conclusions must defer to the analysis undertaken in Chapter 8, which suggests that the credits generated by inclusion of REDD will not be as cheap and easy to come by as commentators have suggested. Indeed REDD may not be amenable to generating marketable credits of a volume required to make a significant difference to the level of global greenhouse gas emissions. The World Bank recognizes both the social and economic complexities that beset forestry projects and at the same time the socioeconomic benefits that potentially accompany them (as demonstrated in the case study above), and is taking an important leadership role. It is intervening and bringing to fruition afforestation and reforestation projects under the CDM, as well as through pilot projects in REDD, which the unassisted market has so far been unable to deliver. The architecture of future arrangements for forestry is in large measure dependent on the continuation of generous financial support by developed countries for dedicated funds such as those of the World Bank.

REFERENCES Australian Government (2007), ‘The national carbon accounting toolbox’, Canberra, Australia: Australian Greenhouse Office. BioCarbon Fund (2008), ‘BioCarbon Fund’, Washington, DC: the World Bank. Bird, D., M. Dutschke, L. Pedroni, B. Schlamadinger and A. Vallejo (2004), ‘Should one trade tCERs or lCERs?’, Encofor, available at http://www.joanneum.at/encofor/publication. Boyd, E., E. Corbera and M. Estrada (2008), ‘UNFCCC negotiations (pre-Kyoto to COP-9): what the process says about the politics of CDM-sinks’, International Environmental Agreements, Politics, Law and Economics, 8(2), 95–112. Commonwealth of Australia (2007), ‘Tracking to the Kyoto target’, Canberra: Department of Climate Change, available at http://www.greenhouse.gov.au/. Europa (2008), ‘Questions and Answers on the Commission’s proposal to revise the EU Emissions Trading System’, available at http://europa.eu/rapid/pressReleasesAction.do?reference5MEMO/08/35. Grubb, M., C. Vrolijk and D. Brack (1999), The Kyoto Protocol: A Guide and Assessment, London: Royal Institute of International Affairs/Earthscan. Höhne, N., S. Wartmann, A. Herold and A. Freibauer (2007), ‘The rules for land use, land use change and forestry under the Kyoto Protocol – lessons learned for the future climate negotiations’, Environmental Science and Policy, 10, 363–9. Hunt, C. (2004), ‘Australia’s greenhouse policy’, Australasian Journal of Environmental Management, 11(2), 156–63.

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IPCC (International Panel on Climate Change) (2000), Land Use, Land-use Change and Forestry, a special report of the IPCC, Cambridge, UK: Cambridge University Press. IPCC (International Panel on Climate Change) (2006), IPCC Guidelines for National Greenhouse Gas Inventories, Hayama, Japan: IPCC/National Greenhouse Inventories Programme. Jung, M. (2005), ‘The role of forestry projects in the clean development mechanism’, Environmental Science and Policy, 8, 87–104. Locatelli, B. and L. Pedroni (2006), ‘Will simplified modalities and procedures make more small-scale forestry projects viable under the Clean Development Mechanism?’, Mitigation and Adaptation Strategies for Global Change, 11, 621–43. Neeff, T. and S. Henders (2007), Guidebook to markets and commercialization of forest CDM projects, Turrialba, Costa Rica: Centro Agronómico Tropical de Investigation y Enseñanza. Neeff, T., L. Eicher, I. Deecke and J. Fehse (2007), Update on Markets for Forestry Offsets, Turrialba, Costa Rica: Tropical Agricultural Research and Higher Education Center (CATIE). Olschewski, R. and P. Benítez (2005), ‘Secondary forests as temporary carbon sinks? The economic impact of accounting methods on reforestation projects in the tropics’, Ecological Economics, 55, 380–94. Schlamadinger, B., N. Bird, T. Johns, S. Brown, J. Canadell, L. Ciccarese, M. Dutschke, J. Fielder, A. Fischlin, P. Fearnside, C. Forner, A. Freibauer, P. Frumhoff, N. Hoehne, M. Kirschbaum, A. Labat, G. Marland, A. Michaelowa, L. Montanarella, P. Moutinho, D. Murdiyarso, N. Pena, K. Pingoud, Z. Rakonczay, M. Rametsteiner, J. Rock, M. Sanz, U. Schneider, A. Shvidenko, M. Skutsch, P. Smith, Z. Somogyi, E. Trines, M. Ward and Y. Yamagata (2007a), ‘A synopsis of land use, land-use change and forestry (LULUCF) under the Kyoto protocol and Marrakech Accords’, Environmental Science and Policy, 10, 271–82. Schlamadinger, B., T. Johns, L. Ciccarese, M. Braun, A. Sato, A. Senyaz, P. Stephens, M. Takahashi and Z. Xiaoquan (2007b), ‘Options for including land use in a climate agreement post-2012: Improving the Kyoto Protocol approach’, Environmental Science and Policy, 10, 298–305. UNEP (United Nations Environment Programme) Risoe (2008a), ‘CDM rulebook’, available at http://cdmrulebook.org. UNEP (United Nations Environment Programme) Risoe (2008b), ‘CDM/JI pipeline’, available at http://cdmpipeline.org/overview.htm. United Nations (1998), ‘Kyoto Protocol to the United Nations Framework Convention on Climate Change’, New York: United Nations. UNFCCC (United Nations Framework Convention on Climate Change) (1992), ‘United Nations Framework Convention on Climate Change’, available at http://unfccc.int/resource/docs/convkp/conveng.pdf. UNFCCC (United Nations Framework Convention on Climate Change) (2002), ‘Sixth Synthesis Report on activities implemented jointly under the pilot phase’, available at http://unfccc.int/resource/docs/cop8/07a01.pdf#page533. UNFCCC (United Nations Framework Convention on Climate Change) (2004), Decision 19/CP9, proceedings of the Conference of the Parties on its ninth session, 1–12 December 2003, Milan (Addendum Part Two: Action taken by the conference of the Parties on its ninth session, Bonn, pp. 13–31), available at http://unfccc.int/resource/doscs/cop9/06a02.pdf.

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UNFCCC (United Nations Framework Convention on Climate Change) (2006a), Report of the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol on its first session, held in Montreal, 28 November–10 December 2005, Part two: Action taken by the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol at its first session, United Nations, New York., March, FCCC/KP/CMP/2005/8/Add.3 30, available at http://unfccc.int/resource/docs/2005/cmp1/eng/08a03.pdf#page53. UNFCCC (United Nations Framework Convention on Climate Change) (2006b), Report of the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol on its first session, held in Montreal, 28 November–10 December 2005, Decision 16/CMP, Annex, D. Article 12 , Para.14, 30 March, FCCC/KP/CMP/2005/8/Add.3, available at http://unfccc.int/resource/docs/2005/ cmp1/eng/08a03.pdf#page53. UNFCCC (United Nations Framework Convention on Climate Change) (2008a), ‘Kyoto Protocol Status of Ratification’, available at http://unfccc.int/files/ kyoto_protocol/status_of_ratification/application/pdf/kp_ratification.pdf. UNFCCC (United Nations Framework Convention on Climate Change) (2008b), ‘Small scale CDM methodologies’, available at http://cdm.unfccc.int/methodologies/SSCmethodologies/index.html. UNFCCC (United Nations Framework Convention on Climate Change) (2008c), ‘Facilitating reforestation for Guangxi Watershed management in Pearl River Basin’, available at http://cdm.unfccc.int/Projects/prosearch.html. Wara, M. (2007), ‘Is the global carbon market working?’, Nature, 445, 595–96. World Resources Institute (WRI) (2008), Climate analysis indicators tool (CAIT) version 5.0, Washington, DC: WRI.

3.

Forestry in voluntary carbon markets

Only a small proportion of the potential of forestry to mitigate climate change is being realized (Nabuurs et al., 2007; Capoor and Ambrosi, 2008). The realization of this potential is dependent on the inclusion of greenhouse gas (GHG) emission reductions by forestry in global and national markets for greenhouse gas reductions. The previous chapters examined the role of forestry in national and global regulated markets; this chapter analyzes the role of forestry in voluntary markets. The benefit of reforestation, in terms of climate change mitigation, is the difference between carbon (C) bio-sequestered with the forestry project and without the project. The global markets are in terms of tonnes of carbon dioxide equivalent (CO2e), rather than in C, and 1 tonne of C 5 3.67 tonnes of CO2e, where CO2e is the expression of the global warming potential of GHGs in terms of their equivalence with CO2 (IPCC, 2007: Table 2.14, p. 212). The global market for offsets in 2007, in terms of volume and value, was double that in 2006, and worth $64 billion; the volume of voluntary offsets within the total market in 2007 was only 2.2 percent and their value only 0.55 percent, but grew even more rapidly; fourfold in volume and threefold in value (see Table 3.1). Unlike the regulated markets, where emitters have a monetary incentive to offset rather than abate emissions, or where forestry developers have an incentive to generate emission allowances for sale, the voluntary market does not rely on legally mandated reductions to generate demand. Instead, demand is driven by public image considerations, reduction of guilt, a sense of moral obligation, or all three. Forestry offsets are sold on the basis that a sufficient area will be afforested or reforested to sequester a mass of carbon equivalent to 1 tonne of CO2e emitted in the present, by some future year (often in 100 years’ time). Advantages of the voluntary market are that (1) there is a wide range of offset products available; (2) transaction costs are low relative to creating certified emission reductions (CERs) (carbon credits approved by the Clean Development Mechanism (CDM) Executive Board); and (3) it provides individuals as well as institutions and corporations with the 67

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Carbon sinks and climate change

Table 3.1

Volumes and values of offset projects, 2006 and 2007

Market

Volume (Mt CO2e) 2006

2007

Value (US$ millions) 2006

2007

Non-CCX CCXa

14.3 10.3

42.1 22.9

58.5 38.3

258.4 72.4

Total voluntary marketb

24.6

65.0

97.7

330.8

c

EU ETS Primary CDMd Secondary CDMe Joint Implementation New South Wales

1 044 537 25 16 20

2 061 551 240 41 25

24 436 5 804 445 141 225

50 097 7 426 5 451 499 224

Total regulated markets

1 642

2 918

31 051

63 697

Total global market

1 667

2 983

31 148

64 028

Notes: a The voluntary offsets sales include those under the Chicago Climate Exchange (CCX), in which members can trade in offsets to meet their binding emission caps. b The voluntary market is very much smaller than the regulatory markets where the offsets are used to meet mandatory emission targets at the lowest cost. c EU ETS 5 European Union Emission Trading Scheme. d CDM 5 Clean Development Mechanism of the Kyoto Protocol. e In secondary CDM markets investors purchase a security from an investor rather than the issuer. Source:

Hamilton et al. (2008); Capoor and Ambrosi (2008).

opportunity to play a role in mitigating global warming, often as part of a ‘carbon neutral’ strategy, that is, where an entity abates or offsets all of its carbon emissions. Brokers and wholesalers link the demand for forestry offsets with a supply of bio-sequestered carbon via retailers. The voluntary markets deal in verified emission reductions (VERs) which are verified either by third parties or the seller, or emission reductions (ERs) which are not; neither is tradable in the official exchanges set up under the Kyoto Protocol or by governments, such as the Automated Power Exchange in California (Energy-Exchange, 2008) and the Greenhouse Friendly scheme in Australia (Australian Government 2006a). In 2006, forestry was the most popular offset mechanism in the voluntary market, accounting for 36 percent of market share (Hamilton et al., 2008: Figure 12). Customers see trees and forests as tangible, providing habitat and generating community benefits (Brand and Meizlish, 2007). Of the 43 retailers of offsets listed by Bayon et al. (2007, p.126), 23 sold forestry

Forestry in voluntary carbon markets A/R plantation Mixed 2% methods Geological sequ'n 7% 1%

69

A/R mixed species 8% Avoided def'n 5% Agric soil 3% Livestock 4%

Fuel switching 8%

Energy efficiency 17%

Landfill 6% Coal MMa 7%

Industrial gas 2%

Non-REC RE (grid) 19% REC 4%

Non-REC REb (non grid) 7%

Notes: Afforestation/reforestation by plantations (A/R), by mixed native species and by avoided deforestation made up 15% of the total sold a Coal MM 5 Coal mine methane capture. b RE 5 Renewable energy. c RE C 5 Renewable energy credit in electricity grid. Source:

Hamilton et al. (2008: Figure 10).

Figure 3.1

Proportions of types of non-Chicago Climate Exchange voluntary offsets, 2007

offsets: some exclusively and some with a mix of products. However, the relative popularity of voluntary forestry offsets weakened considerably in 2007, constituting only 15 percent of the voluntary market, as illustrated in Figure 3.1. The relative weakening of interest is likely to be due to inherent difficulties in marketing forestry offsets compared with other offsets; an issue that is dealt with below.

3.1

THE NATURE OF OFFSETS

A project is an offset if its GHG reductions compensate for GHGs generated elsewhere. The two great natural carbon sinks of the world are the

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oceans and the native forests. Additional forestry sinks can be created through bio-sequestration, the process where forestry plantations trap CO2 already in the atmosphere, incorporating increasing amounts of C from the CO2 molecule into trunks, branches, roots and leaves as the plantation grows. In contrast, geo-sequestration, a technology still being developed, captures GHGs before they enter the atmosphere and pipes them into disused mines or wells. Both types of sequestration can be used as offsets. In contemplating making a contribution to tackling climate change, individuals and households have choices. They may decide to reduce their carbon footprint by reducing greenhouse emissions at source, for example by cutting back on car use or upgrading to a smaller and more fuel-efficient vehicle; or at home, by installing insulation or solar panels to reduce reliance on electricity from coal fired utilities. Such actions prevent, right now, an increase in the concentration of greenhouse gases and make a contribution to mitigating global warming and climate change. Such actions may also save the household money, especially if subsidies on expensive options such as solar power installation are generous and if the household is credited for supplying power to the grid. Chapter 2 illustrates how legal caps on industry emissions induce firms to cut their emissions. Power utilities are cases in point. They can become more efficient by switching from coal to gas, which emits less greenhouse gas per unit of electricity generated. We also see in Chapter 2 how, in capped industries, the possibilities for trade mean that the utilities with high costs of reducing their emissions to meet their caps will purchase emissions allowances from utilities that can reduce theirs at lower cost. These low-cost utilities, as well as meeting their own caps, make reduction to the extent of the allowances they have sold. It is a win–win situation: the buying utility saves on the cost of reductions and the selling utility makes money on the purchases, while the overall cap remains in place. 3.1.1

Going Carbon-neutral with Offsets

Most power utilities in the US and Australia, and indeed in most countries outside the EU, do not yet face emission caps. This does not mean that they are uninterested in reducing their emissions. Utilities, along with other businesses and institutions, want to be, and to appear to be, good corporate citizens. The householders we were discussing are also motivated by the moral necessity to do the right thing to somehow mitigate the effects of the emissions that they are not able to avoid. The cheapest options available for emissions abatement are adopted first. As abatement intensifies, the cheap options are exhausted and it

Forestry in voluntary carbon markets

RENEWABLE ENERGY PROJECT

t CO2e emissions abated t CO2e emissions in year

t CO2 emissions avoided

t CO2e emissions to offset

71

t CO2e emissions avoided t CO2e emissions with project

t CO2e emissions without project

t CO2e reduced tC sequestered

COMPANY, INSTITUTION OR INDIVIDUAL

REFORESTATION PROJECT

Note: There is a limit, in terms of costs, to the proportion of annual greenhouse gas emissions that can be abated by the company, institution or individual. The purchase of offsets in a renewable energy project and in a reforestation project, together with abatement, delivers carbon neutrality. The sequestration of one tonne of carbon in a reforestation project removes 3.67 tonnes of atmospheric CO2e.

Figure 3.2

Achieving carbon neutrality by purchasing offsets

becomes progressively more expensive to abate. In the case of households, car use is still necessary, the house must still be heated in winter and relatives must still be visited by air. Likewise, a utility that switches to gas still needs to emit greenhouse gases, albeit a lesser amount. An option that presents itself to entities wanting to become ‘carbon-neutral’ is not to cut emissions further, because this has become either very expensive or technically impossible, but instead to offset their remaining emissions by abating emissions elsewhere. It is seen in Chapter 2 how parties to the Kyoto Protocol can offset emissions in other industrialized countries through Joint Implementation, or in developing countries through the CDM. In this chapter, however, the discussion centers on the purchase of offsets on a purely voluntary basis, and not because they are necessary for industry compliance under a mandatory cap and trade scheme or for countries meeting their Kyoto Protocol targets. Figure 3.2 shows the introduction of carbon-neutral policy by a company, institution or individual through abatement and with offsets. Emissions are offset elsewhere through a renewable energy project, and a carbon sequestration (reforestation) project and these, together with the abatement of emissions, may confer ‘carbon-neutrality’. The markets for voluntary offsets are now described in terms of buyers, sellers, product differentiation and volumes.

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3.2 3.2.1

Carbon sinks and climate change

THE MARKETS FOR VOLUNTARY OFFSETS The Buyers

In a sample of sellers of voluntary offsets taken by Harris (2007), businesses bought two-thirds of offsets in 2006, while individual and households comprised 17 percent of the market, and events and conferences were less important buyers at 8 percent. In analyzing the criteria adopted by buyers, other than the offset of CO2e, it was found in the study that price per tonne of CO2e was the most important for businesses; and what are called ‘co-benefits’ to the environment and to community development were also important. In the case of individuals, co-benefits dominated the selection criteria and were more important than price. Events and conferences were most concerned with the reputation of the provider of the offset, as were charities and non-government organizations. As would be expected, non-government organizations (NGOs) were very concerned about whether the project genuinely offset greenhouse gases, that is, the ‘additionality’ of projects. Additionality ranked relatively low as a concern with most buyers but, along with standards adopted by the providers of their offset product, was a persistent requirement by all groups. Hundreds of business organizations are going carbon-neutral, while an untold number of individuals are motivated to offset their emissions from business flights or commuting. A survey of the 2007 market by Hamilton et al. (2008) confirmed that most offset buyers in 2007 were private businesses in developed countries. Two-thirds of their purchases were for the immediate offset of the emissions, while the remaining third was as an investment. NGOs comprised 13 percent of buyers, individuals 5 percent and government entities less than 1 percent. Individuals transacted a relatively small proportion of the market, given the small parcels purchased. The greatest demand was from the European Union (EU), with 47 percent of the credits purchased, followed by North America, with 37 percent and Australia and New Zealand 8 percent. The motivation among businesses to reduce emissions is less than in developed countries, while households in developing countries have insufficient income to support luxury goods such as offsets. Hamilton et al. (2008) confirmed that the criteria applied by buyers were many and varied. Corporate responsibility and public relations branding were very important, as were co-benefits, additionality, certification and reputation of the supplier. The benefits in terms of sales and advertising were important, while price and convenience were less important.

Forestry in voluntary carbon markets

3.2.2

73

The Sellers

Between the buyer of offsets and the project that is the source of the offset, there are wholesalers and retailers. Hamilton et al. (2008: 29) estimated the total number of voluntary offsets sellers at 316. Developers of projects were in the majority, with retailers, wholesalers and brokers less important. However, brokers were handling much more business than hitherto, being responsible for almost 50 percent of the volume of trades. Not-for-profit (NFP) sellers will offset CO2e on behalf of a business or individual in return for a tax-deductible donation. NFP sellers include NGOs that take philanthropic tax-deductible donations, thus appealing to individuals who cannot claim a business deduction. NFP organizations such as NGOs are mostly interested in simply retiring offsets. A company, on the other hand, will be indifferent between making a tax-deductible donation or a payment to a for-profit (FP) company, which is a business expense. The rules on tax deductibility of offset expenditures will vary from country to country, however. Unlike NGOs, companies may be more interested in the purchase of the rights to the carbon offsets so that they can be traded on the market. A distinct trend is the increase in the volume of trades handled by FP sellers, as opposed to NFP sellers. This may be explained by the rise of brokers and retailers in the market at the expense of NGOs and developers. However, there are examples of NFP and FP sellers complementing each other as project developers. With the help of FP companies, an NGO purchased conservation easements on the Great Plains, which meant that it could then sell the ensuing carbon offsets (Ducks Unlimited, 2008). With the exception of credits sourced within the Chicago Climate Exchange (CCX) or the EU Emission Trading Scheme (ETS), which are country- or region-specific, offset projects can be initiated anywhere in the world. Most transactions, in terms of tonnes of CO2e sold, were in Asia (39 percent), followed by North America (27 percent) and Australia and New Zealand (7 percent). Forestry was an important type of offset in Canada, the US and Australia and rather less important in Asia and Latin America (Hamilton et al., 2008: 33; Figure 16). Offsets sold in the voluntary market can also be sourced from the regulated markets, the CCX or the CDM. The mechanism of the CCX is illustrated in Box 3.1. In the case of the CDM, offsets are from projects that have not been officially registered or issued with CERs. The volume-weighted average prices per tonne of CO2e in the non-CCX voluntary offset market rose from $4.10 in 2006 to $6.10 in 2007. This increase in price may be accounted for by the fact that more offsets are being verified according to third party standards, which increase their costs, and by the fact that the share of the more expensive renewable energy sectors is increasing (Hamilton et al., 2008).

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Carbon sinks and climate change

BOX 3.1

THE CHICAGO CLIMATE EXCHANGE (CCX) AND FORESTRY OFFSETS

Full members of the CCX make a voluntary but legally binding commitment to reduce CO2e. Phase I required an annual reduction of 1 percent from baseline, which is the average of annual emissions from 1998–2001. Phase II, from 2007, requires a 6 percent reduction below baseline, which is the average of annual emissions from 1998–2001, or the single year 2000. Volumes and values traded doubled between 2006 and 2007 (see Figure 3.3). Trade is in allowances, issued to members according to their baselines, or in offset credits generated by projects. Members who exceed their goal may sell their emission allowances. Members who fail to meet their goal must buy allowances or purchase project-based offsets. Projects of less than 10 000 tonnes of CO2e are registered and sold through an Offset Aggregator. Participant members are project developers, offset providers, offset aggregators, and liquidity providers, the latter by trading in the exchange. CCX offsets are issued retrospectively for the year in which the CO2e reduction took place. This is in contrast to most voluntary forestry offsets that are bought and sold on the basis of carbon sequestered over 30 to 100 years in the future. Verification of the baseline and increased carbon stocks is by dependent third parties. Avoided deforestation is catered for as well as afforestation. To cover the possible losses of forest carbon, a 20 percent pool is held in reserve which, given no losses, is released to project owners at the end of the program. Landowners contract to maintain the land in forest for at least 15 years from the enrolled date (CCX, 2008b). At the end of 2008 the price had fallen to $1.60, due partly to a fear that CXX credits would not comply under a cap and trade scheme mooted by president-elect Obama. Bellassen and Leguet (2007) found that about half the retailers specialized in selling offsets while half provide offsets along with services such as calculating emissions and reduction methods, or they link to the provision of supplementary benefits such as sustainable development or forest protection. Sixty-three retailers, brokers and wholesalers of voluntary offsets were in the US, while the United Kingdom, Australia and Canada hosted a total of 47. The concentration of voluntary business in the US is

101 100 99 98 97 96 95 94 93 92 91

75

Reductions Phase I and II Reductions Phase II only

Phase I reductions

0 01 y2

y2

00

9

8 00 y2

y2

00

7

6 y2

00

5 y2

00

4 00 y2

00 y2

se Ba

3

All members 6% below Baseline by 2010 lin e

Emissions %

Forestry in voluntary carbon markets

Phase II reductions

CXX Program Committment Period

Source:

CCX (2008a).

Figure 3.3

Reduction schedule of CO2e for Chicago Climate Exchange (CCX) members

explained by the absence of large-scale regulated markets, while the UK has long been a hub for financial service providers. It is perhaps an indication of the rate of growth in the number of providers and the difficulty of determining their numbers and location that Ribón and Scott (2007: 42) listed 18 organizations in Australia compared to the seven listed by Bellassen and Leguet (2007: Appendix 1: 29). European retailers had as many projects in developing countries as in their home countries, while retailers based in non-European countries tended to concentrate on their home markets. Projects were concentrated in North America (44 percent), Asia (22 percent) and South America (20 percent) (Bellassen and Leguet, 2007: Figure 13). Of 84 retailers, 43 sold forestry offsets and, of these, 32 specialized in forestry (Bellassen and Leguet, 2007: Appendix 1: 29). As well as retailers there are wholesalers, including the World Bank and US investment company Climate Wedge. Sellers of offsets also include companies, such as oil companies, who sell offsets as a supplement to their product. 3.2.3

Product Differentiation

Methodologies available for calculating GHG emissions offset by projects including forestry are: the GHG Protocol of the World Resources Institute and the World Business Council for Sustainable Development, the ISO

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Carbon sinks and climate change

Standard 14064, the California Climate Change Registry, the CarbonFix standard Green-e Climate and Social Carbon. These methodologies were developed to support any voluntary program or seller. Where validations of methodology and GHG reduction calculations are made by a third party according to the above sets of standards, then the product is traded as a verified emission reduction (VER) rather than just an emission reduction (ER). However, VERs are not tradable in the official exchanges set up under the Kyoto Protocol, or by governments, such as the Automated Power Exchange in California and the Greenhouse Friendly scheme in Australia. 3.2.4

Volumes Transacted

‘Pre-compliance’ buyers purchase offsets from CDM projects that are in the pipeline awaiting registration by the CDM Executive Board and the subsequent issue of CERs (Neeff et al., 2007). In fact a whole new market segment called ‘pre-CDM VERs’ has emerged consisting of buyer demand for credits produced by projects that are awaiting their registration or issuance through the CDM regulator (Capoor and Ambrosi, 2007). The Hamilton et al. (2008) survey of brokers found that only 42 percent of sales are currently being registered and was unable to confirm whether offsets sold were into the hands of a final buyer for retirement, or for on-sale. The authors concluded from the data that perhaps 30 percent of voluntary offsets purchased were for resale in a secondary market. Given this manifest difficulty of tracking transactions, there is an obvious potential for the unwitting or deliberate sale of an offset more than once. Several new registries have been set up to account for voluntary offset transactions. Box 3.2 illustrates how double-counting of voluntary offsets can easily happen.

3.3

STRUCTURE AND TRENDS IN MARKETS FOR FORESTRY OFFSETS

The inclusion of forestry as a legitimate means of offsetting emissions is by no means uniform in regulatory schemes, as illustrated in Table 3.2. The import of emission reduction units (ERUs) and certified emission reduction (CERs), which can include forestry projects, is allowed into the EU ETS, but member countries cannot allow industries subject to caps on emissions to initiate forestry offset projects within their borders. The emission reductions generated by Kyoto projects, but not yet registered and issued with ERUs or CERs, can be traded on the voluntary

Forestry in voluntary carbon markets

77

BOX 3.2 DOUBLE-COUNTING TO SPOIL THE VATICAN’S BID TO BE THE WORLD’S FIRST CARBON-NEUTRAL STATE According to a New York Times article (Rosenthal, 2007), a 37 hectare tract of land at Tiszakeski, on the Danube River in Hungary, will be planted with trees to offset the Vatican’s 2007 CO2 emissions. The Vatican has already cut emissions by installing solar panels but wants to offset its emissions from cars, heating and lighting. The land in question is degraded and weed-infested, and carries a low level of carbon that will be increased 10 times by the planting of native saplings. The local company, Klimafa, backed by San Francisco parent Planktos International, will donate the trees and contract the labor. The Vatican is claiming that it has offset its emissions to the extent of the carbon to be sequestered in the future forest. The article notes, however, that the funds for project implementation will be raised by the sale of the carbon credits on the market. If this is so, then the buyer will rightfully claim the credits that the Vatican has already claimed. This case illustrates the risk of double-counting of offset projects in the voluntary market. This risk is reduced by recording the transaction in one of the registries being set up. market. But voluntary forestry offsets cannot be traded in the regulatory markets or in the CCX. To ensure that genuine abatement is achieved by industries or businesses that are subject to emission caps, regulatory schemes and the CCX place limits on the proportion of GHG emissions that can be offset. Any business that can mount a forestry project is a potential forestry offset developer. Voluntary offsets projects tend to be relatively small, averaging only 5000t CO2e, compared with the average under the Kyoto Protocol of 50 000t. We saw in the previous chapter how the transaction costs for Kyoto projects were high, absorbing some 20 to 40 percent of the value of the offset. Voluntary offsets have the advantages of much lower transaction costs and greater flexibility in design. The voluntary market for offsets is diverse as well as dynamic, and afforestation/reforestation (A/R) offsets play an important part (see Figure

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Carbon sinks and climate change

Table 3.2

Forestry offsets in regulatory and voluntary greenhouse gas reduction schemes

Market

Scheme

Allowances tradable

Import of offsets allowed

Forestry offsets allowed

Limit to offsets

Regulatory

NSWa EU ETSc Kyoto Protocol CCXg Greenhouse Challengeh Non-CCXj

yes yes yes yes n.a.i

nob yesd no no no

yes noe yes yes yes

yes yes yes yes no

n.a.

yes

yes

no

Voluntaryf

Notes: a NSW 5 New South Wales Emission Reduction Scheme. b Caters for New South Wales only. c EU ETS 5 European Union Emission Trading Scheme. d Member states may allow their regulated industries to use emissions reduction units (ERUs), generated by Joint Implementation (JI) projects, and certified emissions reductions (CERs) generated by the Clean Development Mechanism (CDM) projects in third countries, in meeting their emission targets. e Land use, land-use change and foresty (LULUCF) projects in EU ETS member states are disallowed. f In contrast to emission allowances generated under regulatory schemes that are homogeneous and facilitate trade, voluntary emission offsets are diverse in type and may or may not be approved under different standards. The emission reduction units claimed are therefore discounted according to the risk assessment of the buyer. g CCX 5 Chicago Climate Exchange. h Greenhouse Challenge 5 Voluntary scheme of the Australian government. i n.a.5 not applicable. j Non-CCX 5 All voluntary offsets other than generated by CCX. Sources:

Europa (2008); Greenhouse Gas Reduction Scheme (2008).

3.1) (see note 3). However, the 15 percent of total offset sales commanded by forestry in 2007 is in contrast to the 36 percent in the previous year. The fall was most marked for offsets of mixed species plantations, from 31 percent of all offsets traded in 2006 to 8 percent in 2007, as depicted in Figure 3.4. The fall in the proportion of forestry offsets in 2007 appears to have been the result of a combination of factors. There had been a great deal of speculation in the press and elsewhere about the investment risks posed by plantations. For example The Economist (2006) said in relation to offsets: ‘One popular sort involves planting trees, which remove carbon from the atmosphere as they grow: but this approach is now somewhat discredited, since the carbon may be released back into the atmosphere again when

Forestry as a % of total voluntary offset market

Forestry in voluntary carbon markets

79

35 2006 2007

30 25 20 15 10 5 0 A/R plantation

Note: Source:

A/R mixed native

Avoided deforestation

A/R5 afforestation or reforestation Hamilton et al. (2008: Figure 12).

Figure 3.4

Percentage market share of forestry in the non-Chicago Climate Exchange voluntary offset market, 2006 and 2007

the trees are cut down’. In the following year The Economist (2007) again cast aspersions on the voluntary market, particularly in relation to the difficulty of calculating both emissions from air travel and how much carbon trees sequester. Box 3.3 provides an example of the claims of a project developer with respect to carbon benefits and associated co-benefits. Chapter 2 deals with how the stringent Kyoto Protocol rules are applied to the issues of permanence and measurement.8 Parts of the voluntary forestry market are now embracing similar rules that, if adopted widely, will restore confidence among buyers; at the same time, however, transaction costs will increase. In 2007 buyers were more attracted to well-understood project types like methane capture and destruction from landfill and agricultural waste, and renewable energy projects, than to forestry. A preference for quality has been assisted by the further development of standards and registries which were taken up enthusiastically by sellers in 2007, covering 52 percent of the projects that chose to adopted standards in that year (Hamilton et al., 2008: 54). The Voluntary Carbon Standard (VCS) was the most popular, used by 29 percent of those who adopted standards; other standards are the Gold Standard, VER1, the California Climate Action Registry and Green-e Climate (Hamilton et al., 2008: Figure 22). The price of offsets from forestry plantations tended to be more expensive than other types of offsets, averaging $7 to $8 per tonne of CO2e (Hamilton et al., 2008: 39), and this may also have been a deterrent to investors.

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Carbon sinks and climate change

BOX 3.3

CLAIMS OF A VOLUNTARY OFFSET PROJECT WITH SUSTAINABLE DEVELOPMENT CO-BENEFITS

A US-based, not-for-profit organization uses tree planting as a vehicle for delivering development programs in Africa, Asia and Latin America. The benefits of tree planting claimed include soil erosion control, fruit and wood products production, and fodder for livestock. The site of the NGO explains that a typical jet emits 1lb of CO2 for every passenger-mile flown, and therefore a ton of CO2 per passenger over 2000 miles. It is claimed that each tree planted in the humid tropics absorbs 1 ton of CO2 over its lifetime. Voluntary labor keeps the cost of planting a tree down to a mere $0.10 each. Therefore the cost per ton of CO2 sequestered is $0.10. The suggestion is that the purchase of three trees for $0.30 will offset 3 tons of CO2 emitted by a round-trip New York–Los Angeles–New York. Certificates of denomination of US$1.00 to US$40 are offered so that the customer can travel without damaging the atmosphere, by planting more than the required number of trees. Travel kits are on offer to travel industry businesses that include logos for promotional purposes. Trees in this program have a range of uses. It is unlikely, however, that fruit trees, trees harvested for wood products, or used by grazing cattle will attain the level of carbon sequestration claimed. Moreover, losses are inevitable in tree plantations and it is possible that many of the trees will not survive to maturity. If trees do survive, their lifespan could well be less than 50 years, depending on species. While the sustainable development objectives and methods of the program may be exemplary, the claims with respect to the level of CO2 offsets achieved embody many of the uncertainties that have led to adverse criticism of voluntary forestry offsets as a method of climate change mitigation. In summary these are: ●

A message is sent that it is not necessary to cut personal travel when a ton of CO2 can be offset for US$0.10;

Forestry in voluntary carbon markets ●

● ●

3.4

81

The CO2 emitted will not be completely offset until 50 years have elapsed, whereas a reduction in travel would cut CO2 emissions immediately and permanently; The amount of carbon to be sequestered by trees is in doubt especially given their multiple uses; The permanence of the carbon sequestered is questionable given the possibility of disease, fire, the limited life span of trees and the possibility of conversion of the land to other uses.

AVOIDED DEFORESTATION AS A VOLUNTARY OFFSET

The upward trend in investing voluntarily in projects that reduce deforestation could well continue. The level of interest in the reduction in deforestation and forest degradation (REDD) was stimulated by the encouragement given by the United Nations Framework Convention on Climate Change (UNFCCC) Bali Conference in late 2007. Specifically, Decision 2/CP.13 ‘Reducing emission from deforestation in developing countries: approaches to stimulate action’ (UNFCCC, 2008: 8) contains the following clauses: ‘Recognizing that efforts and actions to reduce deforestation and to maintain and conserve forest carbon stocks in developing countries are already being taken.’ ‘Invites parties to further strengthen and support ongoing efforts to reduce emissions from deforestation and forest degradation on a voluntary basis’ (emphasis added). The long list of outstanding methodological issues raised in this decision (Clause 7) suggests that devising acceptable methodologies for the inclusion of avoided deforestation, acceptable to parties under the post-Kyoto Protocol agreement, will be a long and difficult procedure. Meanwhile, the potential of the voluntary market for REDD is highlighted by the effective commercialization of a large scheme in Aceh, the finance for which is to be raised by Merrill Lynch (Ecosystem Marketplace, 2008).

3.5

THE CREDIBILITY OF FORESTRY OFFSETS: ISSUES OF PERMANENCE AND TIMING

If voluntary offset markets are to flourish and assist in bringing down the cost of reducing greenhouse emissions, the units of currency should be as

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Carbon sinks and climate change

homogeneous as possible. A tonne of CO2e abated should be equal in all respects to a tonne of CO2e removed from the atmosphere by A/R. But, as discussed above, forestry offsets have been criticized because of the risk that carbon might not remain sequestered in forests over the long term. Forests may be felled or burned, or die as a result of climate change. Even under forestry offset schemes run by governments, guarantees are for a limited period; for example, the Australian Government’s Greenhouse Challenge program requires the maintenance of forests and restoration of any losses over a period of 70 years (Australian Government, 2006a: 14). Another characteristic of forestry offsets is that they take time to remove carbon from the atmosphere. Hamilton et al. (2008) report that emission reductions marketed from forestry offset projects will occur over periods of 35 to 100 years into the future, and ex ante accounting, where future CO2e removals by plantation forests are sold before they occur, is the norm. Forestry offsets sold ex ante are not perfect substitutes for the immediate abatement of emissions: energy efficiency measures deliver abatements more quickly, while avoidance of the use of fossil fuels delivers abatement immediately. The issue here is that until full offsetting occurs at the end of the period over which the forestry project is planned, a stock of GHGs not offset remains in the atmosphere, causing climate change and thus incurring damage costs to society. How effectively markets deal with impermanence and the incremental removal of CO2e, two characteristics of forestry offsets, forms the second part of this chapter. 3.5.1

How the Issue of Permanence is Dealt With in Different Schemes

The Kyoto Protocol deals with the issue of permanence of A/R projects by assuming that all carbon credits generated by forestry are temporary. In the Clean Development Mechanism (CDM), CERs are either long-term (lCER) or short-term (tCER). Both types must be replaced by Kyoto units at expiry (see note 2). While this rule guarantees that forestry CERs are of similar value to other Kyoto units, it also adds complexity to the process of registering a CDM project. (Chapter 2 provides a more detailed account of how the issue of the permanence of carbon sequestration is tackled by the Kyoto Protocol.) In the voluntary markets a different approach is followed that relies on buffer stocks and other methods to shield against the risk that the forest on which offsets are based will be destroyed. In Greenhouse Friendly (GF), the voluntary scheme of the Australian government, forestry projects are required to have a buffer of 20 to 30 percent in excess of the carbon

Forestry in voluntary carbon markets

83

sequestered and sold from the project. The carbon in GF forest sinks must be verified every five years, and a requirement for annual reporting means that annual losses in sequestered carbon that come to light are debited to the project. Credits of GF projects are counted in the land-use, land use change and forestry (LULUCF) section of Australia’s carbon accounts. The CCX has a similar system, except that the buffer or forestry reserve pool, equal to 20 percent of all forestry offsets generated, is held by the exchange itself. The risk of reductions in carbon is further reduced by the policy of issue of CCX offsets retrospectively on the basis of an annual increase in carbon verified to be actually sequestered. Forestry offsets are thus fully fungible with other types of CCX offsets. In contrast to practice in regulated markets, however, voluntary deals are often negotiated on a case-by-case basis requiring no such certification or verification, nor registration with a central authority that maintains a greenhouse gas inventory. The VCS has been developed to improve the transparency of forest offsets by introducing rules governing the measurement and additionality of carbon sequestered and, in particular, rules governing buffer stocks with the aim of reducing risks associated with the impermanence of forests.The VCS automatically approves projects that are registered under the CDM and JI. It also uses a single pooled buffer account to reduce the risk of impermanence, but the way in which the buffer offers insurance is different from that in other schemes. In the VCS, future verification of carbon sequestered by an A/R project is optional. However, the proportion of carbon benefits held in the buffer is lower, and the proportion that can be traded as Verifiable Carbon Units (VCUs) higher, if verification is carried out regularly. In the VCS the initial size of the buffer for each project is determined by an assessment of risk factors including not only natural disasters but financial and political factors also. If the risk assessment remains the same or improves from one verification period to the next, then 15 percent of the project’s buffer reserve is released from the pool and made available for trading over the five years until the next risk assessment. If a project’s risk rating increases from one five-year verification to the next, then there is no reduction in the buffer reserve. If a project fails to submit a verification report within five years of the last, then 50 percent of its buffer credits are automatically cancelled. After another five years all its buffer credits are cancelled. It should be noted that although carbon may be lost to the system and the buffer stock is cancelled, VCUs already issued are considered permanent and do not need to be paid back. In the future, individual VCS projects could have the option of managing non-permanence risk through insurance products as they become

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Carbon sinks and climate change

available. In the GF and CXX schemes the risk of impermanence is reduced by undertakings that forest sinks will be maintained for future periods. The VCS requires no such undertaking because any impermanence is reflected in the loss of buffer stock (VCS, 2007). Unlike the Kyoto Protocol, the CXX and the VCS both cater for the generation of offset credits by reducing deforestation (RED). The VCS employs the same buffer stock method in countering the risk of losses from RED projects as it does for A/R projects. The higher the risk of deforestation rates above baseline levels and the shorter the project expected lifetime, the higher the buffer is set. Existing RED methodologies are important given RED’s vast potential to avoid emissions, and the current consideration by the UNFCCC of the inclusion of RED protocols in post-Kyoto arrangements. 3.5.2

More on the Issue of Timing

As discussed above, forestry offsets are invariably sold on an ex ante basis, that is future reductions in atmospheric GHGs by plantation forests are sold to customers intent on offsetting contemporary GHG emissions. An exception is the CCX, where the sale of offsets including forestry offsets is retrospective, that is, after the actual removal of CO2e from the atmosphere and the sequestration of carbon have actually occurred. Despite the development of rules governing impermanence issues in forestry, the VCS and other standards such as ISO 1464, do not at the time of writing address this temporal mismatch of emissions and their offset. Because forest offsets take time to remove carbon from the atmosphere, they are not perfect substitutes for the abatement of emissions by, for example, energy efficiency measures. Until full offsetting occurs at the end of the period over which the forestry offset is planned, a stock of GHGs remains in the atmosphere, causing climate change and thus causing damage costs to society. The analysis that follows, based on Hunt and Baum (2009), shows that the area of plantation forest sold ex ante needs to be increased to fully cover the emissions being offset. The policy implications of this for forestry offset markets are explored. 3.5.2.1 The social costs of carbon released to the atmosphere Estimates of the climate change costs of carbon released to the atmosphere vary widely. The range mainly reflects divergent views on how future costs should be valued in the present but also reflects what is being measured. Here, the marginal social cost (MSC) of carbon is taken as the annual cost, reflecting its decay over time, of a pulse of 1t of C emitted in year 1. The profile of MSC of one tonne of carbon emissions over 400 years, in

Forestry in voluntary carbon markets

85

1.2000 1.0000

$

0.8000 0.6000 0.4000 0.2000 0.0000 0

100

200

300

400

500

Years since emission

Note: The marginal social cost is the cost in each year subsequent to the emission in year 1 of 1 tonne of C. Source:

Hunt and Baum (2009: Figure 1).

Figure 3.5

Marginal social cost of 1 tonne of C emissions, 400 years, zero discount rate, year 2000 dollars

the absence of policy intervention, is estimated using data from the DICE model (Nordhaus 1994) and is depicted in Figure 3.5.9 3.5.2.2 The incremental nature of carbon sequestration The next step in this analysis is to establish the profile over time of the incremental mass of C sequestered by A/R. While markets for carbon credits and offsets deal in metric tonnes of CO2e, the methodology in this section is in terms of tonnes of elemental carbon (C). The incremental rates of sequestration of one tonne of C by a pine monoculture plantation of hoop pine (Araucaria cunninghamii) and one of mixed rainforest species is shown in Figure 3.6. The growth rates are derived from the carbon toolbox (Australian Government, 2007), which facilitates modeling of carbon sequestration rates for forests under varied Australian conditions. The profiles of carbon sequestration for A/R in most global locations are expected to be very similar to that in Figure 3.5, with peaks in rates at around 10 to 15 years, and most carbon sequestered by year 85. For example, see Birdsey (1996) and Stavins and Richards (2005) for profiles of carbon sequestered by timber plantations in the United States, and the Australian Government’s guide to forest sink planning (Australian Government, 2006b, Figure 1, p. 8).

86

Carbon sinks and climate change 0.045 monoculture rainforest

0.04 0.035

Tonnes of C

0.03 0.025 0.02 0.015 0.01 0.005 0 –0.005 0 –0.01

50

100

150

Years since planting

Note: While the rates of removal of C from the atmosphere per hectare differ between mixed rainforest species and faster-growing monocultures, the marginal rates of sequestration to one tonne of C are almost identical. Source:

Hunt and Baum (2009: Figure 3).

Figure 3.6

Incremental tonnes of C sequestered, to 1 tonne, by a reforestation with a monoculture of hoop pine (Araucaria cunninghamii) and by mixed rainforest species over 100 years

3.5.2.3 Cost not offset by ex ante forestry offsets Net costs are incurred in the early years of an offset when the rate of MSC increase is greater than the marginal sequestration rate of C. At the certainty equivalent discount (Newell and Pizer, 2000) which declines over time from 4 percent to 2 percent over 100 years, 21.4 percent of present costs are not covered by the 100-year offset. This effect of mismatch between the rate of increase of marginal costs and marginal carbon sequestration is exaggerated in a 30-year offset because there is very little growth in the first few years after tree planting, and these early years make up a far bigger proportion of the span of 30 years than they do of a span of 100 years. Hence the costs not offset are higher, with 26.4 percent of costs not offset at the certainty equivalent discount. Figure 3.7 shows the marginal social costs offset over time by a 100-year forestry offset that achieves carbon neutrality in year 100, at the certainty equivalent discount. While incremental sequestration equals marginal costs at project expiry, marginal social costs are incurred in the interim. Table 3.3 shows the costs not offset and offset by afforestation at various discount rates. The percentage of costs not offset in column 2 can be employed as a factor that needs to be applied to the effectiveness

Forestry in voluntary carbon markets 0.12

87

MSC 1t emitted MSC 1t C offset MSC 1t C not offset

0.10 0.08

$

0.06 0.04 0.02 0.00 0

20

40

60

80

100

120

–0.02 Years since planting

Note: Carbon neutrality is achieved when the forest offset project has removed 1 tonne of carbon from the atmosphere in year 100. However, net social costs have been incurred in every year since year 1 when the emissions occurred. Source:

Hunt and Baum (2009: Figure 4).

Figure 3.7

Carbon-neutral offset where a 100-year afforestation/ reforestation project offsets 1 tonne of C emitted in year 1, certainty equivalent discount

of a forestry offset, at a certain discount rate, when comparing it with a reduction of carbon emissions in year 1. Alternatively, the inverse of the results in column 3 of Table 3.3 can be expressed as the enhancement of the area of forestry necessary, ceteris paribus, for a forestry offset to achieve 100 percent cost offset or ‘cost neutrality’. This rate is 1.27 for a 100-year project at the certainty equivalent discount rate, as illustrated in Figure 3.6, and 1.36 for a 30-year project. Figure 3.8 shows how marginal costs are covered when the area of forestry is increased by a factor of 1.27 to achieve cost-neutrality. A further component of the study by Hunt and Baum (2009) was a comparison between not harvesting hoop pine, harvesting hoop pine, and a consequent complete accounting loss of all the above-ground carbon, and harvesting where 35 percent of above-ground carbon is sequestered in product after harvest. It was found that harvesting increases the percentage of costs not offset compared with no harvesting. Where an allowance is made for the carbon sequestered in product, the percentage of costs not offset increases further. The effect of harvesting the hoop pine plantation, and of sequestering the product, is to delay reaching 1 tonne of C sequestered, leading to an increase in costs not covered.

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Carbon sinks and climate change

Table 3.3

Present value and proportion of social costs not offset and offset by 100-year and 30-year afforestation/reforestation projects offsetting 1 tonne of C emitted in year 1 Present cost 1t C emitted ($)

Cost not offseta $ (%)

Cost offset $ (%)

100-year offset Discount rate 0 0.01 Cert Equiv 0.04

55.9 28.9 7.2 5.6

6.6 (11.8) 4.3 (14.7) 1.5 (21.4) 1.4 (25.8)

49.3 (88.2) 24.6 (85.3) 5.6 (78.6) 4.2 (74.2)

30-year offset Discount rate 0 0.01 Cert Equiv 0.04

3.5 2.5 1.5 1.5

0.8 (21.7) 0.5 (21.4) 0.4 (26.4) 0.4 (26.7)

2.7 (78.3) 2.0 (78.2) 1.5 (73.6) 1.0 (73.3)

Note: a The profiles of the marginal social cost of C emitted and the removal of C by sequestration differ; the sequestration rate lags the rate of damage costs incurred. The table values the difference, which is ‘costs not offset’. Higher discount rates generate higher costs not offset because of the mismatch between marginal costs and marginal sequestration rates. Costs not offset in the 30-year project are relatively high because the sequestration rate is slow in the early years. Source:

Hunt and Baum (2009: Table 2).

As the length of the project diminishes, the proportion of emissions not offset increases, for a five-year project to almost 50 percent, as illustrated in Figure 3.9. In a short term offset the costs not offset are greater because in the early years trees grow and sequester carbon slowly, relative to the rate of damage costs being incurred. No matter what climate model is adopted in estimating marginal social costs of emissions, it is likely that damage costs of a tonne of carbon increase more rapidly in the immediate years after release than carbon sequestration rates, and therefore not all social costs will be covered by an offset that achieves carbon neutrality sometime in the future. 3.5.2.4 Policy implications of the analysis for voluntary forestry offsets The voluntary forestry offset is an increasingly popular instrument, marketed on the basis that contemporary greenhouse gas emissions will be offset over time by the carbon sequestered in plantations. Voluntary

Forestry in voluntary carbon markets

89

0.12 0.10 0.08

$

0.06 0.04

MSC 1t emitted MSC 1t C not offset MSC 1t C offset

0.02 0.00 –0.02

0

20

40

60

80

100

120

–0.04 Years since planting Source:

Hunt and Baum (2009: Figure 5).

Figure 3.8

Cost-neutral offset where a 100-year carbon-neutral afforestation/reforestation project is increased in area by 27%, certainty equivalent discount

forestry offsets are more often than not sold ex ante on the basis of 30- to 100-year carbon neutrality. However, buyers are unlikely to be aware of the hidden costs of forestry offsets sold in advance of actual CO2e removals against contemporary emissions (or indeed the hidden costs of other offsets that do not immediately achieve neutrality). For forestry offset projects to avoid incurring social costs they must avoid crediting to the present the removals of CO2e that will occur sometime in the future. Likewise, CO2e releases should occasion a debit in the year of release. The incremental amount of CO2e removed can be obtained by physical measurements of forest carbon, or its estimation according to the carbon sequestration models of afforestation, or a combination of both, where a model’s estimates are validated by physical measurement. The adoption of such incremental crediting and debiting of CO2e removals, expected in the future, aids the establishment of present values of CO2e removals needed to facilitate project financing; the present value of the credits and debits being compared with the present value of costs of the project. Moreover, the net present value of the project can then be compared with that of competing investments. The proportion of costs offset is insensitive to the shifting up or down of the MSC profile. Rather, the proportion of costs offset is correlated with the shape of the profile of MSC of carbon emissions over time. Other emission damages models are likely to yield similar results given the slow initial

90

Carbon sinks and climate change 120.0

Proportion (%)

100.0

0,100.0

80.0 60.0 5, 47.4 40.0 10, 32.3 30, 26.4

20.0

60, 22.6

100, 21.4

0.00 0

50

100

150

Years since planting

Note: Forestry offset projects that claim to be carbon-neutral over a short term fail to cover a higher proportion of the marginal social costs of emissions than long-term projects. Source:

Hunt and Baum (2009: Figure 6).

Figure 3.9

Proportion of present costs not offset by carbon-neutral reforestation/afforestation projects of 1 tonne of C, by length of project, certainty equivalent discount

increase in annual CO2e removals from the atmosphere by sequestration relative to marginal damage cost increases. The policy recommendations that ensue from this analysis are two-fold. 1.

Increments of CO2e removals actually achieved should be traded rather than removals in future years to ensure that forestry offset schemes are cost-neutral, instead of just carbon-neutral. 2. The seller should disclose the estimated annual incremental removal and release (for example in the case of harvesting) of tonnes of CO2e over the life of the offset. This allows a financier to put a present value on the expected stream of CO2e removals by the offset for comparison with other forestry projects and other types of offsets.

3.6

THE FUTURE OF VOLUNTARY FORESTRY OFFSETS

This chapter has so far reviewed what constitutes a tradable voluntary forestry offset and has described the market in terms of sources of demand,

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the variety of products supplied and prices. Two important characteristics of forestry offsets that affect their equivalence with other types of offsets and therefore have implications for markets were discussed: the risk of impermanence, and the fact that they take time to offset present emissions. These characteristics are in contrast to other types of offsets that are both permanent and take effect immediately. The chapter concludes with a review of future prospects for voluntary offsets in the light of the changes in the structure of markets and the trends in demand already in evidence. In 2007 a trend emerged in the increase in buyer demand for credits produced by projects awaiting issuance through the CDM. However, forestry projects constitute a negligible proportion of this market because the number of CDM projects in the pipeline is small. While the volume of offsets traded on the CCX is increasing dramatically, trade rising from 3.3 Mt of CO2e in July 2007 to 4.8 Mt in July 2008, the proportion of trades based on A/R plantation forestry is likely to remain very small, at around 4 percent. In contrast to the bureaucratic and administrative hurdles of the CDM and the lack of certainty for CERs post-2012 (Harris, 2007; Capoor and Ambrosi, 2007), voluntary offsets are cheap to administer, depending on the rigor of verification and location, and timing is not restrictive. There has been heavy demand for forestry offsets from the US, which has not ratified the Kyoto Protocol, and Australia, which only recently ratified the Protocol. It is evident, however, that even where Kyoto parties have introduced schemes to control their emissions, such as in Europe and the United Kingdom, there is still a strong demand in the voluntary market. Some products are verified, certified and labeled, instilling confidence in the buyer that the claims to offset a quantity of CO2e emissions for a given length of time will be met. Nevertheless in a large proportion of the market there is a distinct lack of rigor. Where forestry offsets are not verified by a third party, real possibilities exist for double-counting of the sequestration benefits as well as exaggeration of the offsets achieved. This has led to trenchant criticisms of offsets, and particularly forestry offsets, by commentators in civil society and the media. The fall in market share of forestry of non-CCX offsets in 2007 compared with 2006 was highlighted above, and was linked to the poor report card give forestry offsets, together with the availability of standards that increased the relative credibility of other types of offsets. The finalization of comprehensive rules for forestry in the Voluntary Carbon Standard, which is already the most favored standard in the market, suggests that buyers could be drawn back to forestry. As highlighted above, further improvement is needed in the level of transparency in the market with respect to timing of the forestry offset being sold.

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Most of the demand for forestry offsets is from developed countries, while almost half the projects are executed in developing countries. Projects allow small investors to contribute to projects in Asia, Africa and South America that are marketed as providing social and economic benefits to local communities. If reforestation projects are well designed they can contribute to the provision of vital habitat and wildlife corridors and enhance the chances of survival of threatened and endangered species. In practice, however, the contribution to biodiversity enhancement of forestry offset projects in developing countries based on A/R can be said to be modest unless they are certified under the Climate Community and Biodiversity Alliance. (Chapter 4 reviews the biodiversity benefits of forestry offset projects.) After the Bali Conference there has been a surge of interest in the development of avoided deforestation projects (REDD). Notwithstanding the difficulty of verifying that the forest would be lost without the project and that deforestation would not be shifted elsewhere, REDD has the advantage over A/R projects of delivering immediate emission abatement and real biodiversity co-benefits. The development of standards for REDD, the involvement of the World Bank in piloting such projects, together with the interest shown by major financiers, augurs well for the growth in this segment of the voluntary market. In conclusion, there will always be a market for voluntary carbon offsets that suit the needs of companies and industries, not to mention households that are not covered by mandatory schemes, in reducing their carbon footprint. Buyers are also able to satisfy their desires for environmental and sustainable development benefits. The introduction of standards has increased buyer confidence that the reduction in GHG emissions will actually occur. The issue of the sale ex ante of carbon sequestered in A/R projects is something that needs to be addressed, however.

REFERENCES Australian Government (2006a), ‘Greenhouse Friendly guidelines’, Canberra, Australia: Department of Environment and Heritage. Australian Government (2006b), ‘Planning forest sink projects’, Canberra, Australia: Australian Greenhouse Office. Australian Government (2007), ‘The national carbon accounting toolbox’, Canberra, Australia: Australian Greenhouse Office. Bayon, R., A. Hawn and K. Hamilton (eds) (2007), Voluntary Carbon Markets: An International Business Guide to What They Are and How They Work, London/ Sterling, VA: Earthscan. Bellassen, V. and B. Leguet (2007), ‘The emergence of voluntary carbon offsetting’, Research report No. 11, Caisse des Dépôts, Paris.

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Birdsey, R. (1996), ‘Carbon storage for major forest types and regions in the coterminous United States’, in R. Sampson and D. Hair (eds), Forests and Global Change: Forest Management Opportunities for Mitigating Carbon Emissions, Vol. 2, Washington, DC: American Forests, pp. 1–26. Brand, D. and M. Meizlish (2007), ‘An investor’s perspective on the voluntary carbon market’, in R. Bayon, A. Hawn and K. Hamilton (eds), Voluntary Carbon Markets: An International Business Guide to What They Are and How They Work. London/Sterling, VA: Earthscan, pp. 87–90. Capoor, K. and P. Ambrosi (2008), State and Trends of the Carbon Market 2007, Washington, DC: World Bank. CCX (Chicago Climate Exchange) (2008a), ‘Emission reduction commitment’, available at http://www.chicagoclimatex.com/content.jsf?id572. CCX (Chicago Climate Exchange) (2008b), ‘Afforestation offset projects in Chicago Climate Exchange’, available at http://www.chicagoclimatex.com/docs/ offsets/Afforestation_Carbon_Offsets_faq.pdf. Ducks Unlimited (2008), ‘Plains CO2 reduction (PCOR) partnership’, available at http://www.ducks.org/media/Conservation/EcoAssets/_documents/April%20 2008%20PCOR%20update.pdf. The Economist (2006), ‘Sins of emission: the idea of offsetting carbon emissions is sound in theory, if not yet in practice’, 3 August. The Economist (2007), ‘Ripping off would-be greens: a rapidly growing market is attracting some timely scrutiny’, 15 May. Ecosystem Marketplace (2008), ‘Painting the town REDD: Merrill Lynch inks massive voluntary forest deal’, available at http://ecosystemmarketplace.com/ pages/article.news.php?component_id55584&component_version_id58076 & language_id512. Energy-Exchange (2008), ‘The Energy Exchange Newsletter’, available at http:// www.energy-exchange.com. Europa (2008), ‘Questions and answers on the Commission’s proposal to revise the EU Emissions Trading Scheme’, available at http://www.eu-un.europa.eu/ articles/en/article_7678_en.htm. Fearnside, P., D. Lashof and P. Moura-Costa (2000), ‘Accounting for time in mitigating global warming through land-use change and forestry’, Mitigation and Adaptation Strategies for Global Change, 5, 239–70. Hamilton, K., M. Sjardin, T. Marcello and G. Xu (2008), ‘Forging a frontier: state of the voluntary carbon market’, Washington DC/New York: Ecosystem Marketplace/New Carbon Finance. Harris, E. (2007), ‘The voluntary carbon offsets market: an analysis of market characteristics and opportunities for sustainable development’, London: International Institute for Environment and Development. Houghton, T., M. Filho, L. Bruce, H. Lee, B. Callander, E. Haites, N. Harris and K. Maskell (eds) (1994), Climate Change 1994: Radiative Forcing of Climate Change and an Evaluation of the 1992 IPCC IS92 Emissions Scenario, Cambridge, UK: Cambridge University Press. Hunt, C. and S. Baum (2009), ‘The “hidden” costs of forestry offsets’, Mitigation and Adaptation Strategies for Global Change, 14(2), 107–20. IPCC (International Panel on Climate Change) (2007), The Physical Science Basis, Fourth Assessment Report, Working Group 1: Cambridge, UK and New York: Cambridge University Press. Moura-Costa, P. and C. Wilson (2000), ‘An equivalence factor between CO2

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avoided, emissions and sequestration – description and applications in forestry’, Mitigation and Adaptation Strategies for Global Change, 5, 51–60. Nabuurs, G., O. Masera, K. Andrasko, P. Benitez-Ponce, R. Boer, M. Dutschke, E. Elsiddig, J. Ford-Robertson, P. Frumhoff, T. Karjalainen, O. Krankina, W. Kurz, M. Matsumoto, W. Oyhantcabal, N. Ravindranath, M. Sanz Sanchez and X. Zhang (2007), ‘Forestry’, in B. Metz, O. Davidson, P. Bosch, R. Dave and L. Meyer (eds), Climate Change 2007: Mitigation, contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge, UK and New York: Cambridge University Press, pp. 541–84. Neeff, T., L. Eicher, I. Deecke and J. Fehse (2007), ‘Update on markets for forestry offsets’, Turrialba, Costa Rica: Tropical Agricultural Research and Higher Education Center (CATIE). Newell, R. and W. Pizer (2000), ‘Discounting the distant future: how much do uncertain rates increase valuations?’, Discussion Paper 00-45, Washington, DC: Resources for the Future. Nordhaus, W. (1994), Managing the Global Commons, Cambridge, MA: MIT Press. Ribón, L. and H. Scott (2007), ‘Carbon offset providers in Australia 2007’, Melbourne, Australia: RMIT University. Rosenthal, E. (2007), ‘Vatican penance: Forgive us our carbon output’, New York Times, 17 September, available at http://www.nytimes.com/2007/09/17/world/ europe/17carbon.html. Stavins, R. and K. Richards (2005), ‘The cost of US forest-based carbon sequestration’, Arlington, VA: Pew Centre. UNEP (United Nations Environment Programme) Risoe (2008), ‘CDM Rulebook’, available at http://cdmrulebook.org. UNFCCC (United Nations Framework Convention on Climate Change) (2008), Report of the Conference of the Parties on its thirteenth session, Bali, 3–15 December 2007, New York: United Nations. VCS (Voluntary Carbon Standard) (2007), ‘Voluntary carbon standard’, available at http://www.v-c-s.org.

4.

Biodiversity benefits of reforestation and avoiding deforestation

The term biodiversity encompasses the variety of life on earth, at the genetic, species, habitat and ecosystem levels. As well as such variation, biodiversity includes abundance: the number of genes carried by individuals and populations in different places at different times. Also encompassed is the diversity of interactions between components of biodiversity such as pollination by birds and insects and predator–prey interactions. Biodiversity has evolved over the last 3.5 billion years of the earth’s 5 billion-year history. Major extinction events have occurred in the past but the diversity in the present is that with which the human species has developed (UNEP, 2007). Much biodiversity is found in ten forested countries that contain 88.2 percent of the least disturbed primary forests (FAO, 2006: Figure 2) (see Figure 4.1). Forests not only provide timber for markets, they are also important sources of a range of non-market products such as clean drinking water, fuelwood, building materials, animal protein and medicines. Indirect benefits are provided by the protection of watersheds and biodiversity. A large proportion of the world’s forests provides these benefits in combination (see Figure 4.2). There are large areas of forest in countries in temperate regions but the greatest biodiversity is to be found in forests in the tropics; the rainforests that receive high rainfall and that dominate large areas of Central and South America, Equatorial Africa and South-east Asia being the richest (see Figure 4.3). Most of the tropical rainforests lie in developing countries where there is intense demand for land for other purposes.

4.1 LOSS OF BIODIVERSITY AND DEFORESTATION: THE SCALE OF THE PROBLEM Biological diversity is one of the management objectives for 25 percent of the world’s forests. The area of forest within which conservation of biological diversity is the primary function has increased by 96 million hectares since 1990 and now accounts for 11.2 percent of total forest area, 95

96

Carbon sinks and climate change Russian Federation 20% Others 34% Brazil 12%

India 2% Peru 2% Indonesia 2% Democratic Republic of the Congo 3% Source:

Canada 8% Australia 4%

United States 8%

China 5%

FAO (2006: Figure 2).

Figure 4.1

The ten countries with the largest forest area account for twothirds of the total forest area

Unknown, 7.8

Production, 34.1

Multiple purpose, 33.8

Protection of soil and water, 9.3 Social services, 3.7 Source:

Conservation of biodiversity, 11.2

FAO (2006: Figure 11).

Figure 4.2

Functions of forests globally, 2005, percent

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23.5° N

Tropical forests 23.5° S

Source:

Image courtesy of The Ozone Hole Inc.

Figure 4.3

The world’s tropical forests

mostly in protected areas (FAO, 2006: xix). Despite this a large number of species have become extinct in recent history or are threatened with extinction. Reductions in populations are widespread, and genetic diversity is also widely considered to be in decline. These changes are more rapid than at any time in human history: 100-year records of known species indicate extinction rates around 100 times greater than is characteristic in the fossil record (Millennium Ecosystem Assessment, 2005: 43). From 1990 to 2005 the world lost 35 percent of its forests mainly due to conversion to agricultural land in developing countries. This conversion continues at a rate of 13 million hectares a year, principally in the biologically diverse regions of South-east Asia, Oceania, Latin America, the Caribbean and sub-Saharan Africa (FAO, 2006: xiv, xv). Primary forest, mostly undisturbed and rich in habitat and vascular plant populations, covering 1.3 billion hectares and constituting 36 percent of all forests, is being lost at a rate of 6 million hectares a year (FAO, 2006: Table 1) (see Figure 4.4). While the information on primary forest is incomplete, there is no indication that this rate of loss is slowing (FAO, 2006: 13). On average, eight of the tree species native to a country are critically endangered and 20 are endangered (FAO, 2006: Table 3.9). In contrast, the temperate forests of the developed countries are expanding (FAO, 2006: xv). The principal cause of forest and habitat loss is the conversion of forests to agriculture, while logging and over-exploitation, for such uses as fuelwood, degrades them. Other factors adversely affecting forests to the tune

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Carbon sinks and climate change 8 6.4 6 4 hectares, M

2.2 2 0 –2

Area of primary forest

–4 –6

Area of other wooded land

–3.3

Area of forest designated primarily for conservation of biological diversity

Area of productive forest plantations

–5.8

–8 Source:

FAO (2006: Table 2.4).

Figure 4.4

Average annual change in forest area, 2000–2005, millions of hectares

of over 100 million hectares a year are fire, pests or climate events, but their incidence and impacts are severely under-reported. Forest plantations are increasing by 2.8 million hectares a year and now account for 4 percent of total forest area. Slightly more than 75 percent of all plantations are of introduced species for harvesting while the remainder consists of protective plantations mainly for conservation of soil and water. Asia reported a net gain of 1 million hectares a year from 2000–2005, primarily the result of large-scale afforestation reported by China (FAO, 2006: 82). While extinctions in the heavily converted Mediterranean and temperate forests have reduced biodiversity, this was from a relatively low level of richness. Richness in terms of both species and families is greater by far in rainforests, which now contain the highest number of threatened species. Presently, 12 percent of bird species, 23 percent of mammals, 25 percent of conifers and 52 percent of cycads are threatened with extinction (IUCN, 2006; Millennium Ecosystem Assessment 2005: 44). The rate of forest loss for three biodiversity-rich countries is detailed in Table 4.1. At the rate of loss of forests indicated in Table 4.1, forests will have disappeared in the Democratic Republic of the Congo in 419 years, in Brazil in 154 years and in Indonesia in 46 years. As well as being lost, forests are also being degraded by factors such as logging roads and illegal extraction, but the extent of degradation is difficult to measure (FAO, 2006).

Benefits of reforestation and avoiding deforestation

Table 4.1

Loss of forest in three tropical countries Forest area 2005 million hectares

Brazil Democratic Republic of the Congo Indonesia Source:

4.2

99

478 134 88

Annual net loss, 2000– 2005 million hectares 3.1 0.32 1.9

Annual rate of loss % 0.65 0.24 2.16

FAO (2006: Figure 2.3, Table 2.5).

DRIVERS OF DEFORESTATION: PROXIMATE AND INDIRECT

Over the last 50 years conversion of tropical and subtropical dry forests to agriculture in developing countries has been the most powerful driver. Cultivated systems now cover more than 24 percent of the earth’s surface so that only biomes unsuitable for cropping such as deserts, boreal forests and tundras are relatively intact. All scenarios adopted in the Millennium Ecosystem Assessment (2005: 2) forecast a continuation in the first half of the twenty-first century of the current rate of conversion of forest to agriculture of 13 million hectares a year (FAO, 2006: xiv). The expansion of agriculture and also of cities and infrastructure is being driven indirectly by increases in population growth and changes in consumption patterns. Extensification of agriculture is meeting the increase in demand for products such as soy bean (Latin America and the Caribbean), oil palm and rubber (Asia-Pacific) and coffee (Africa, Latin America and Asia). This is set to continue, given that by 2050 the world’s population will have risen to around 9 billion people. Another powerful indirect driver of consumption and tastes is per capita gross domestic product, which is expected to double or even quadruple, depending on the scenario chosen (Millennium Ecosystem Assessment, 2005). The effects of indirect drivers of deforestation, such as globalization and trade liberalization, need to be anticipated and addressed at the international level. Drivers also include poverty reduction strategies, as typified by structural adjustment programs in the mid-1980s that ignored the integration of ecosystems and ecosystem services, the focus being on institutional and macroeconomic stability and economic growth (Millennium Ecosystem Assessment, 2005). In contrast to trends in developing countries, the efficiency in the use of resources, lower population increases and

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a fall in meat consumption are expected to cause a contraction in the area of agriculture and an increase in forested area in industrialized countries. While biofuels only occupy 1 percent of arable land presently, it is expected that vast areas will be planted to monocultures, replacing marginal agricultural lands that presently support biodiversity. Monoculture plantations in programs designed to mitigate global warming through afforestation and reforestation (A/R) may also contribute to biodiversity loss (UNEP, 2007: 178). 4.2.1

Market Failure and Biodiversity Loss

The approach adopted by the Convention on Biological Diversity (CBD) involves a focus on the functional relationships and processes within ecosystems. Within this approach sustainable forest management is integrated with multiple scale action, intersectoral cooperation, and cognizance of the beneficiaries of the flows of ecosystem services (CBD, 2008a). While under a holistic approach the benefits of ecosystems are more likely to be taken into account in making development decisions, ecosystem and biodiversity benefits are not priced in markets. The comprehensive capture of these unpriced benefits and their translation into financial benefits for the inclusion in decision-making is almost impossible by conventional economic analysis. Even if some of the economic benefits of biodiversity are estimated, the more certain and concrete utilitarian values intrinsic in ‘development’ are likely to continue to outweigh them. There is a distinct spacial disjunct between the benefits and the costs of conversion of forests. High intrinsic values for biodiversity are manifest in the populations of industrialized countries, far from communities in tropical forests who need to raise their incomes by substituting agriculture for biodiverse forest. Moreover, the social values held in developed countries are not being adequately translated into incentives for developing country governments or local communities to conserve their forest (UNEP, 2007). Given the unknown long-term effects of losses of ecosystems (the full manifestations of the loss of wild populations may not play out for decades) together with the irreversible nature of losses of species, a precautionary approach is called for in the setting aside and protection of ecosystems and forested areas. An outstanding feature in forest management globally in the last 20 years is the rate of increase in protected areas, which was over 22 000 million hectares in the last 20 years, and currently stands at 115 000 million hectares. Effective management and enforcement of regulations are, however, variable. Moreover, protected areas are characterized by fixed boundaries that will prevent the migrations necessary by biodiversity at higher latitudes and altitudes to cope with global warming.

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This brings into focus the need for conservation outside protected areas (UNEP, 2007). 4.2.2

Institutional Failure

International agreements are indispensable for addressing the ecosystemrelated concerns that span national boundaries. Numerous multilateral environmental agreements have been instituted to conserve biodiversity, the CBD being the most comprehensive. Other agreements include the World Heritage Convention, the Convention on the International Trade in Endangered Species of Wild Fauna and Flora, the Ramsar Convention on Wetlands, the Convention on Migratory Species, the UN Convention to Combat Desertification, the UN Framework Convention on Climate Change, and there are numerous regional agreements. But globalization as manifested in the proliferation of agreements is a two-edged sword. The powerful international agreements that deal with trade, for example through the General Agreements on Tariffs and Trade (World Trade Organization, 2008), typically ignore impacts on biodiversity (Millennium Ecosystem Assessment, 2005). The conflict between development and conservation policies is often marked in developing countries. Economic ministries are far more influential than weak and underfunded environment ministries. Moreover, ministerial portfolios such as forestry are predisposed to corruption by politicians and officials alike, thus making sustainable forestry practices difficult to implement (Tacconi, 2007a; 2007b). The conservation of biodiversity is not helped by the adoption of unrealistic goals. Parties to the CBD (decision VI/26 COP, April 2002) are committed ‘[T]o achieve by 2010 a significant reduction of the current rate of biodiversity loss at the global, regional and national level as a contribution to poverty alleviation and to the benefit of all life on earth’ (CBD, 2008b:1).This target was incorporated in the Millennium Development Goals at the 61st General Assembly of the United Nations in September 2006. However, as pointed out by the Millennium Ecosystem Assessment (2005), there are trade-offs between the Millennium Development Goals (United Nations, 2007) in meeting poverty, hunger reduction and health targets and the 2010 target of reducing the rate of biodiversity loss. Perverse incentives such as production subsidies work in concert with failure to value biological resources and to internalize environmental costs into prices. Policies are already in place to counteract these failures locally, nationally and internationally ‘[B]ut their full implementation remains elusive’ (UNEP 2007: iii). In relation to the 2010 biodiversity target of the CBD, the UNEP (2007) notes that that the drivers of biodiversity loss are strongly linked to the growth in human population and

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3.5 3 2.5 %

2 1.5 1 0.5 0 1998

1999

2000

2001

2002

2003

2004

2005

Note: Assistance for biodiversity as a proportion of official overseas development assistance has been in decline since 2001. Incomplete data may however account for the relatively low proportion reported in 2005. Source:

CBD (2007: Table 1, page 19).

Figure 4.5

Biodiversity assistance as percentage of total overseas development assistance, 1998–2005

associated necessary increases in consumption of energy and resources, and concludes that these trends do not bode well for meeting the target on a global scale. The weakness of global efforts to halt biodiversity loss is highlighted by the failure of the CBD to undertake any estimation of its funding needs. This task had not been accomplished by 2007, even in the face of the Convention’s declaration of 2002 that biodiversity loss will be reduced by 2010 (CBD, 2007). The World Parks Congress in 2003 concluded that budgets for protected areas in the early 1990s totaled only about 20 percent of the estimated $20 to $30 billion annually required to establish and maintain a comprehensive protected area system (CBD, 2007: 2). A review of the biodiversity assistance as a proportion of development assistance averaged 2.1 percent over the period 1998–2004 (CBD, 2007: Table 1, 19). This proportion could be in decline (see Figure 4.5). While ecosystem restoration is a common practice around the world, it is far costlier than protecting the original ecosystem (FAO, 2006). The magnitude of the costs of restoration is illustrated in case studies later in this chapter. Another policy failure common to most countries that exacerbates the loss of biodiversity is absence of natural asset balances in national accounts. For example, the income from logging primary forest contributes to gross

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domestic product, but the fact that there has been, at the same time, a reduction in the value of a country’s forest asset (which should include the value of sequestered carbon as well as the value of timber) is not recorded.

4.3

CONCLUSIONS ON LOSS OF BIODIVERSITY

The key realities with respect to trends in biodiversity loss can be summarized as follows: ●

●

●

●

4.4

The powerful indirect drivers of biodiversity loss: world population growth, the need to raise millions out of poverty and rises in real GDP per capita, are not expected to abate. Direct drivers of land-use change, that is conversion of forests to agriculture, urbanization and infrastructure development, are expected to remain constant or increase in the near future. While rates of ecosystem loss are decreasing in temperate areas, they are increasing in tropical areas rich in biodiversity. Even though progress is being made in estimating the total economic value of ecosystems, weak and fragmented global and national institutions are incapable of effecting the internalization of the value of the loss of ecosystems in development decisions. There is a severe lack of funds to establish a comprehensive global system of protected areas.

PLANTATIONS FOR CARBON CAPTURE AND BIODIVERSITY CONSERVATION: COMPLEMENTARY OR CONTRADICTORY?

Caparrós and Jacquemont (2003) expected that the creation of economic incentives for carbon sequestration by afforestation and reforestation, such as under the Kyoto Protocol, will yield a sub-optimal result of overplanting of fast-growing alien species with a potential negative impact on biodiversity: ‘The Convention on Biological Diversity lacks economic incentives which would ensure that agents will follow the optimal social strategy whereas the Kyoto protocol creates economic incentives’ (Caparrós and Jacquemont, 2003: 155). Studies suggest that while fauna may be sighted in pure stands of trees, they are less likely to be species that depend on rainforest habitat and, when they are, their presence is related to nearby remnant native forest (Barlow et al., 2007; Catterall and Harrison, 2006; Lindenmayer and

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Fischer, 2006). Both on-site and off-site (for example water quality) biodiversity values are considerably greater for environmental plantings than for hoop pine monoculture (Kanowski et al., 2005). The sections below test the positive and negative contributions of forestry schemes to biodiversity; the next section examining the design features of forestry offsets, both in regulatory and voluntary schemes, is followed by a review of the activities designed to reduce deforestation and degradation (REDD). 4.4.1

Biodiversity Implications of Forestry Offsets in Annex I Countries

To maintain consistency the definitions used to describe plantation forestry are those that have been adopted by the UNFCCC in Article 3 of the Kyoto Protocol (United Nations, 1998), which recognizes removals of greenhouse gases by human-induced land-use change and forestry activities. A meeting of the parties to the Protocol (UNFCCC, 2006: 5) defined the allowable activities in the first commitment period (2008–2012) as follows: ●

●

Afforestation (A): The direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources. Reforestation (R): The direct human-induced conversion of nonforested land to forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the first commitment period reforestation activities will be limited to reforestation occurring on those lands that did not contain forests on 31 December 1989.

The importance of these definitions from a biodiversity viewpoint is that they exclude the possibility that native forests can be cleared for A/R. 4.4.1.1 Forestry offset schemes and biodiversity in the US As noted in Chapter 2, forestry has the potential to offset a large proportion of emissions in the US. Presently, the Chicago Climate Exchange (CCX) is North America’s only active voluntary, but legally binding trading system aimed at reducing emissions of greenhouse gases. CXX members who cannot reduce their own emissions can purchase credits from those who make extra emission cuts through eligible offsets, of which afforestation is one.10 However, the CXX does not differentiate between types of afforestation, that is whether they are of native species or exotic monocultures.

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Oregon has established a program for creating forestry carbon offsets from non-federal forestlands and requires the State Forester to develop a forestry carbon offset accounting system (Oregon Legislative Assembly, 2001). Effective in January 2002, the bill defines a forestry carbon offset and authorizes the State Forester to enter into agreements with non-federal forest landowners as a means to market, register, transfer or sell offsets on behalf of non-federal landowners. It also allows the State Forester to market, register, transfer or sell offsets on behalf of the Forest Resource Trust. The Regional Greenhouse Gas Initiative (RGGI) of ten eastern states has been drafted with the inclusion of forestry offsets. California also has a cap and trade scheme to control emissions in the draft stage; this includes forestry but the details of how forestry will be treated are to be determined. Non-government organizations in the US have urged that only plantings of native species (RGGI, 2008a) or mixed native species (RGGI, 2008b) should be allowed as offsets. 4.4.1.2 Forestry offsets and biodiversity issues in the UK In England there is official concern that threats to biodiversity may result from increasing emphasis on carbon sequestration that involves intensive forest management (that is monocultures) or tree planting that replaces semi-natural habitat harboring biodiversity (DEFRA, 2007). In Scotland, environmental non-government organizations have a clear policy position on carbon sequestration, believing that it should not be the primary driver of forestry policy in the management of the Scottish National Forest Estate or of the grants that promote forestry (LINK, 2008). A shift away from existing priorities towards support for carbon sequestration per se is not supported. The primary focus of Forestry Commission Scotland should, in the opinion of LINK, continue to be on ensuring the delivery of multiple public benefits such as enhanced biodiversity, improved access and health opportunities, landscapes and historical environment enhancement and rural economic development. Given climate change threats to Scotland’s landscapes and biodiversity, an adaptation policy is promoted that restores and expands native and mixed woodlands, forest habitat networks and low impact silvicultural systems, which would at the same time deliver secondary carbon sequestration benefits. 4.4.1.3 The European Union’s ETS and forestry offsets Under the Kyoto Protocol, countries can combine to meet a regional emissions target. Such a scheme is the EU Emission Trading Scheme, a cap and trade scheme that has been in place since 2005. The EU ETS does not allow members to offset their emission through in-country forestry activities. Afforestation and reforestation (A/R) projects can, however, be

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undertaken by EU members in non-Annex I parties under the CDM. The impacts that such projects might make on biodiversity conservation are illustrated in the case studies of CDM projects below. 4.4.1.4 Forestry for carbon capture and biodiversity in Australia Australia’s cap and trade scheme, designed to meet its greenhouse gas emissions target in the first commitment period of the Kyoto Protocol, 2008–2012 (as well targets associated with any international post-Kyoto agreement), will not be in place until 2011 at the earliest (Australian Government, 2009). Meanwhile, schemes are in place whereby carbon sequestered by tree planting can be approved by the Australian and New South Wales governments, and subsequently purchased by businesses wishing to offset their greenhouse gas emissions (Australian Government, 2006; Government of New South Wales, 2008). The following Australian case study deals with the potential impacts of reforestation, driven by the market for forestry offsets, on biodiversity in the Wet Tropics Region of Queensland. The Mabi forest of the Wet Tropics is listed as ‘endangered’ by the Queensland government and ‘critically endangered’ by the Australian government. This type of forest has been reduced to a mere 4 per cent of its original extent (Department of Environment and Water, 2007; Environmental Protection Agency, 2007) because it lies mainly on private land with agriculturally productive basaltic soils. The rate of increase in Mabi forest being achieved by reforestation programs is considered by ecologists to be well below what is required to guarantee the survival of the endangered ecosystem and species (Catterall and Harrison, 2006). The question asked in this case study was: are the goals of carbon sequestration and increase in biodiversity mutually exclusive or complementary in the Wet Tropics of Queensland, Australia? (see Box 4.1.) The results of economic analysis (see Figure 4.6) suggest that landowners intent on generating income from carbon sequestration are likely to choose to plant unharvested monocultures of softwoods and hardwoods, rather than environmental plantings. 4.4.1.5 New Zealand’s ETS and biodiversity As yet, few Annex I countries have adopted national schemes that allow industries to meet their targets by offsetting emissions through forestry plantations. New Zealand’s emissions trading scheme (ETS) is one of the first and it encourages forest carbon sinks of either exotic or native species or ‘assisted indigenous reversion’ (Ministry of Agriculture and Forestry, 2008: 2). (Under the Kyoto Protocol, reforestation includes the ‘human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land’ (UNFCCC, 2006: Annex A)).

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BOX 4.1 AN AUSTRALIAN CASE STUDY OF REFORESTATION A question addressed in research into forestry offsets in tropical Australia was: are the goals of carbon sequestration and biodiversity conservation through reforestation mutually exclusive or complementary? The favorable climate and soils of the Wet Tropics Region of north Queensland have enabled the evolution of unique ecosystems. However, some of these have been reduced to only a very small proportion of their original area by conversion to agriculture. While an official priority is the encouragement of rainforest plantations on private land with the aim of augmenting the endangered ecosystem and the habitat of iconic species, this reforestation is heavily subsidized by the Australian government and it is not deemed to be at a sufficient rate to guarantee the ecosystems’ survival. Economic analysis finds that, at 2007 prices, payments for sequestered carbon defrayed only a small proportion of reforestation costs, providing a level of incentive insufficient to stimulate restoration. Moreover, comparative analysis shows that plantations of monocultures sequester carbon at a much lower cost per tonne than plantations of native rainforest species. The asymmetry between the availability of credits for carbon and the lack of credits for biodiversity, and the consequent need for public investment in conservation and restoration, is thus highlighted (Hunt, 2008). Once trading units (NZUs) equivalent to one tonne of carbon dioxide equivalent (CO2e)11 have been allocated according to the carbon sequestered in plantations or in reverted forest, they can be bought and sold in New Zealand and traded in the international market under the Kyoto Protocol, being interchangeable with AAUs (Ministry of Agriculture and Forestry, 2008). From a biodiversity conservation perspective, New Zealand’s ETS is important because the ability to trade the value of carbon in regenerated forests provides an incentive to landowners to provide habitat that would otherwise be absent. The New Zealand Emissions Biodiversity Exchange will audit the carbon and biodiversity gains during the regeneration process, then market the credits to businesses or individuals wanting to offset their greenhouse gas emissions. Typically, sites are on privately owned land that cover areas in excess of 100 hectares. Regeneration is encouraged

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Note: The cost of replacement of pastures with softwood plantations, which are invariably monocultures, is much cheaper and more likely to be profitable as a carbon sink than the establishment of mixed species environmental plantations. Source:

Hunt (2008: Figure 5).

Figure 4.6

Costs per tonne of carbon sequestered by environmental plantings and softwoods for harvesting compared, 0.01 discount, Wet Tropics of Queensland

by the following: removal of grazing animals, fencing to prevent grazing, weed and pest control, disallowing harvesting and consigning the land to reforestation in perpetuity (Emissions-Biodiversity Exchange, 2008). There are already large areas of exotic plantations in monocultures in New Zealand and it remains to be seen to what extent native plantations that harbor biodiversity will be encouraged, compared to exotic plantations grown with a view to providing harvestable timber along with carbon credits. It also remains to be seen to what extent the biodiversity value of individual regenerating plots can be enhanced by corridors. 4.4.2

The Clean Development Mechanism and Biodiversity

The main official vehicle for the establishment of forests for carbon sequestration in developing countries is the Clean Development Mechanism (CDM) within the Kyoto Protocol. Under the CDM, forestry projects in a non-Annex I country can be counted as offsets against emissions by the initiating Annex I country.12

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An examination of the titles of the methodologies for A/R approved by the CDM Executive Board (UNFCCC, 2008a) suggests that most of the ten approved have an identifiable biodiversity component. The aims of the projects vary from combating desertification and soil erosion, to reforestation on degraded land and corridor establishment, to woodchip production. To attract investment, A/R projects must show a positive financial return from the carbon credits generated plus any supplementary returns from timber or non-wood products sales. To achieve financial viability, projects must often rely on only a limited number of fast-growing species, which in some cases may be exotics. As discussed above, the biodiversity benefits that can be claimed for monocultures or plantations of a narrow list of species are limited, particularly if they are exotics and particularly if regrowth of natural vegetation under the planted trees is controlled. Nevertheless, A/R projects may provide indirect biodiversity benefits such as relieving pressure on fuelwood extraction from protected areas by local populations or providing plantation buffers around wildlife reserves. Two case studies follow to demonstrate the kind of biodiversity benefits that can be generated by A/R projects under the CDM; the first is in China, being the only project to achieve CDM registration at the time of writing, and the second in Tanzania, which is in the validation stage. 4.4.2.1

Biodiversity implications of the Pearl River Basin CDM project in China This section is a case study of the first A/R CDM project to be registered by the UNFCCC ‘Facilitating reforestation for Guangxi watershed management in the Pearl River basin’. The source of the material is the project design document, available online (UNFCCC, 2008b). The project is located in Cangwa County, which has a subtropical monsoon climate, and Huanjiang County, with a cooler transitional monsoon climate, of the Guangxi Zhuang Autonomous Region in southern China. The project area is surrounded by dense human settlement, ten townships and 27 villages being involved in the project. The original forest lands have been severely degraded and are now lowproductivity barren lands with grass or shrubs that continue to degrade. The area has suffered large-scale deforestation since 1950, and has been overused for fuelwood, overgrazed and subject to frequent fire. Even though cattle grazing has ceased, the forest will not regenerate naturally because seed sources are some distance away, and in any case seedlings suffer severe competition from grasses. Although few protected flora and fauna species are found within the project boundary, the region is one of the richest in China in terms of plant diversity. In the project area the forest is mainly tropical evergreen

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broadleaf with over 300 tree species from 66 families in fragmented remnants. Close to the project area, in Hunajiang County, are two nature reserves: the Mulun Reserve and Jiuwandashan Reserve, which contain more than 3000 vascular plants. The reserves harbor many threatened species, including the Assamese Macaque (Macacca assamensis), Amur Leopard (Panthera pardus), Chinese Forest Musk Deer (Moschus berezovskii), White-necklaced Partridge (Arborophila gingica) and the Burmese Python (Python molurus).The Daguishan Forest Park bordering the project area in Cangwu County contains about 1000 plant species and important fauna, including the Chinese Pangolin (Manis pentadactyla), Clouded Leopard (Neofelis nebulosa) and Eliot’s Pheasant (Syrmaticus ellioti). In the project five native tree species will be planted in pairs of species on 6000 hectares and Eucalyptus spp. will be planted on 2000 hectares. The carbon content of the plantations will be measured and will generate Certified Emission Reductions (CERs) for sale. Local farmers and communities would not be able to implement such a project without the CER revenues generated, given the investment and technical barriers and the market risks involved. Additional benefits are to be generated by resin collection from Pinus massoniana from 16 years, Liquidambar formosana and Schima superba will be harvested for timber at around 17 years and replanted, while Quercus spp. and Eucalyptus spp. will be harvested at around 10 and 7 years respectively and will regenerate naturally. The project document claims that wildlife corridors are provided between forest remnants and national reserves. The use of native species and avoidance of large areas of monocultures are said to enhance the connectivity potential of the corridors between two national reserves. It claims that habitat for birds, mammals and snakes will be provided as well as roosting sites for migratory birds. Importantly, by generating increased income of local communities it is said that the project will reduce the key threats to the nature reserves of poaching and the removal of timber and forest products. If the biodiversity claims of this project are subjected to critical analysis, the following conclusions can be reached that suggest that the project will make only a very limited contribution to biodiversity: ● ●

There will be little addition to habitat as such, as the species mixture is very narrow, being chosen primarily to provide an economic return. It is not expected that native species will form an understory of native shrubs as the plantations will be managed for their economic benefits, competing trees being removed in the process of weed control. In any case, the design document considers that the reserves are too far distant to serve as a seed source for natural regeneration.

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Evidence that the proposed corridors will be used by the threatened and rare species in the reserves and national parks is not produced.

4.4.2.2 Biodiversity implications of A/R in Tanzania The second case study of an A/R CDM project is in two discrete areas of Tanzania where it establishes and manages forest plantations that will meet demand for high quality wood products from a sustainable managed forest, and is titled: ‘Afforestation in grassland areas of Uchindile, Kilombero, Tanzania and Maplpana, Mufindi, Tanzania’. A Tanzanian subsidiary company of TreeFarms AS, of Norway, is financing and implementing the project. The project document is accessible online (Tüv Süd Group, 2008). Some 13 500 hectares of degraded land will be reforested, mainly with exotics (Eucalyptus spp. and Pinus patula), but with the addition of some indigenous fruit tree species, together with three species of indigenous hardwoods at Uchindile and two at Mapanda. Revenue will be generated for the government, district council and villages through the sale of wood products and certified emission reductions (CERs). In addition, employment will be generated in the local communities that total over 6000, while new infrastructure such as roads will stimulate economic development. Presently the wildlife of the area is limited to species such as wild pigs, moles, rodents and a few birds. Native grassland and pockets of indigenous vegetation that may contain endemic or rare species are to be left intact and protected. The total area of natural vegetation that will be protected and possibly enhanced totals 5000 hectares. Buffer zones on water courses of 30 meters width will not be planted. The spread of plantation species into the conservation areas will be monitored. Endangered species, including Osyris lanceolata, Prunus africana and Protea spp., have been indentified, and such areas will be mapped and protected, as will the breeding habitats of rare birds. The supply of wood from the plantations will relieve pressure on indigenous forests from the collection of building materials and fuelwood. Natural regeneration is not expected to occur within the project area as the seed bank in the soil is minimal after many years of burning the grassland that replaced the forest. The material presented in the design document suggests that the biodiversity benefits of this project are confined mainly to the conservation of patches of native grassland and forest remnants. There is no attempt to enhance the native vegetation along waterways or to create corridors in the project areas.

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Biodiversity Standards in Voluntary Forestry Offset Schemes

Having analyzed examples of how the regulatory carbon market might impact biodiversity through afforestation and reforestation, the analysis of the implications of forestry sinks now turns to the biodiversity implications of forestry offsets in voluntary markets. Voluntary schemes for offsetting greenhouse emissions are examined in depth in Chapter 3. These types of offsets, certified by third parties or not, come in many different forms, from wind farms, to industrial gas destruction, to wetland conservation. Carbon credits generated by voluntary schemes are not tradable in the official exchanges set up under the Kyoto Protocol or by governments such as the EU ETS or in Australia’s Carbon Pollution Reduction Scheme. Nevertheless, the voluntary market is the only effective market for forestry sinks given that no certified credits have (at the time of writing) yet been issued for A/R projects under the Clean Development Mechanism of the Kyoto Protocol (UNEP Risoe, 2008). The demand for voluntary offsets is by governments, institutions, businesses and private citizens wishing to offset their emissions for ethical, guilt or public image reasons. Forest offsets as opposed, for example, to wind farms or switching fuels, are often preferred because buyers are attracted by the promise of associated biodiversity and social benefits (Bayon et al., 2007). Brokers and intermediaries organize the supply of land for forestry sinks and bring the supply and demand together. Figure 4.7 shows the types and shares of voluntary projects, and Figure 4.8 the location of forestry projects by type. While the statistics on types of voluntary projects yield little in terms of their benefits or otherwise to biodiversity, it is noteworthy that avoided deforestation, which implies a co-benefit of biodiversity benefit, increased from 3 to 5 percent of the total market in 2007. The next section turns to examining standards being applied to voluntary forestry offsets schemes with particular reference to the criteria applied to assessing their biodiversity impacts. Then follows a summary of the innovative sources of funding to reducing emissions from deforestation and degradation (REDD). 4.4.3.1 Standards in voluntary forestry offsets There is no guarantee in the uncertified voluntary markets, that is those outside the Kyoto Protocol, that A/R has not been established by clearing the site of native vegetation. This situation highlights the importance of the adoption of standards for forestry in the voluntary offsets markets such as the Voluntary Carbon Standard (VCS, 2008). The sole international label that requires forestry offset projects to have a net positive impact on biodiversity is the Climate Community &

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Note: The share of afforestation/reforestation (A/R) plantations remained steady at 2% in 2007 but mixed species plantation fell sharply from 2006 to 2007. Renewable energy, energy efficiency and fuel switching became more popular. ‘Fugitive’ emissions are from leaks in equipment, pipeline seals or valves. Source:

Hamilton et al. (2008: Figure 12).

Figure 4.7

Market share of voluntary offsets by project type, 2006 and 2007

Biodiversity Alliance.13 As of June 2008, the CCBA has nine projects in the pipeline, mainly in developing countries, waiting for verification, with another 100 projects in the offing. The nine projects cover almost 800 000 hectares and will abate or absorb 4 million tonnes of CO2e per year. Thirty per cent of them are for avoided deforestation, 30 percent for native forest restoration, and 14 percent for sustainable forest management, while the balance is for plantations. The CCBA claims that projects that generate multiple benefits and not just carbon credits are more likely to attract a diverse portfolio of investors. For example, a reforestation project with verified environmental and socioeconomic benefits might attract private investors for the carbon credits, plus government money for sustainable development, in addition to philanthropic grants for biodiversity conservation. Box 4.2 describes an avoided deforestation project in Aceh, the first sanctioned by CCBA (2008a). In addition to formal labeling, retailers can gain credibility through endorsement by environmental organizations; for example Environmental Defense in the US backs five retailers that meet its environmental criteria. An example of schemes that try to ensure that forestry offset projects are

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Note: It should be noted that the high level of avoided deforestation sales in Australia/ New Zealand shown in the figure came about mainly as a result of the Queensland government issuing limited permits for clearing as part of its policy to end the broad-scale clearing of remnant vegetation from 2006; some landowners holding permits to clear opted instead to sell the carbon sequestered in their standing forests (Jackson, 2007). Source:

Hamilton et al. (2008: Appendix 2).

Figure 4.8

Voluntary offset credits sold in 2007 by location and volume

more than monocultures of exotic species is the up-and-running Climate Action Registry of California. This is not a trading scheme, rather it brings together providers and buyers of offsets and applies forest protocols, negotiated with the input of environmental organizations, to the projects in the registry. The protocols are detailed explanations of the quantification and reporting of carbon stock changes and emissions in registered forestry projects. Three types of forestry projects may be reported and certified in the Registry (California Climate Action Registry, 2007:11, 12): ●

●

●

Conservation-based Forest Management Projects: Forest projects that are based on the commercial and non-commercial harvest and regeneration of native trees and employ natural forest management practices. Reforestation Projects: Forest projects that are based on the restoration of native tree cover on lands that were previously forested but have been out of tree cover for a minimum of 10 years. Conservation Projects: Forest projects that are based on specific actions to prevent the conversion of native forest to a non-forest use such as agriculture or other commercial development.

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BOX 4.2 THE ULU MASEN AVOIDED DEFORESTATION PROJECT IN ACEH There are several stakeholders in the 750 000 hectare Aceh project designed to reduce deforestation by 85 percent in 30 years, thus avoiding the emission of 3.3 million tonnes of carbon dioxide annually. The project area, the Ulu Masen Forest Ecosystem, is the last large unprotected area of rainforest in Sumatra, containing the Sumatran Elephant (Elephus maximus), the Clouded Leopard (Neofelis nebulusa), the Sumatran Tiger (Panthera tigris sumatrae) and the Sumatran Orangutan (Pongo albelii) (Mapala, 2007). The major project partners are the local communities, the Government of Aceh, Fauna & Flora International, a UK-based environmental organization, and Carbon Conservation Ltd, an Australian ecosystem services company. A third party, the Rainforest Alliance, audited and validated the project against the project design standards for ancillary social and biodiversity benefits set by the Climate Community & Biodiversity Alliance (2008b). A reduction in logging is expected to generate carbon credits and profits. To raise investment funds Merrill Lynch is offering its retail and commercial clients voluntary carbon credits at an expected initial price of US$5–10 per tonne of CO2e. This is expected to facilitate an investment of US$48 million in the first five years, half of which will be spent on economic development in villages through the cultivation of palm oil, coffee and cocoa, to be marketed under the brand name ‘Aceh Green’ (Ecosystem Marketplace, 2008; Rainforest Alliance, 2008). The chapter finishes with a review of innovative funding of biodiversity conservation through REDD. 4.4.4

Biodiversity Implications of Innovative Funding Mechanisms for Voluntary REDD Schemes

The World Bank’s BioCarbon Fund has pioneered A/R activities under the CDM of the Kyoto Protocol. The BioCarbon Fund funded the Pearl River Basin project in China, the first CDM project to be registered, reviewed in Chapter 2, and assessed for its biodiversity impacts above. A

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second fund of the World Bank, the Forest Carbon Partnership Facility (FCPF), is aimed at REDD by applying value to the carbon in standing forestry. By implication, projects that avoid deforestation will at the same time lead to the conservation of the biodiversity in the reprieved forests. The FCPF has two parts, the Readiness Mechanism and the Carbon Finance Mechanism. The former assists 20 tropical and subtropical countries in voluntarily readying themselves for future REDD. Strategies are prepared and emissions monitored from deforestation and degradation. The Carbon Finance Mechanism will subsequently select a few countries for the pilot phase, which will make incentive payments for independently verified emission reductions by REDD. A variety of approaches will be considered for financing and testing. For example, macro policy and legal reforms in forest conservation and management, land-use policies, payments for environmental services, establishment of parks and intensification of agriculture. The target size for the Readiness Mechanism is US$100 million and for the Carbon Finance Mechanism US$200, the sources being both private and government. It is intended that much larger financial flows will be made possible over the medium term through the knowledge and experience developed in the pilot phase (World Bank, 2008).

4.5

THE BIODIVERSITY BENEFITS OF FORESTRY CARBON SINKS: CONCLUDING COMMENTS

Tropical and subtropical forests are rich in biodiversity but are suffering a rapid rate of conversion to other land uses, particularly agriculture. The indirect drivers of deforestation, rapid population and economic growth in developing countries, are very powerful and probably inexorable. In the absence of national and local rewards for preserving forests, economic and social imperatives in deforesting countries outweigh the benefits of conservation. Governments fall back on regulatory approaches to the prevention of deforestation but these often fail because of weak administration or corruption. The international organizations that promote biodiversity conservation are ineffectual compared with pro-development trade and financial organizations. For example, there is no specific funding allocated to carry out the goal of the Convention on Biological Diversity to halt deforestation. At the same time government departments responsible for forest conservation in developing countries tend to be weak. While there has been

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a welcome increase in the level of forest protection afforded by National Parks, the effectiveness of such reserves in developing countries is often problematic. Given that carbon removed from the atmosphere by plantation forests now has a market value, a question was asked whether the consequent increase expected in plantations would favor the retention or increase in biodiversity. Case studies of two CDM projects under the Kyoto Protocol suggested that the direct biodiversity benefits are limited because the species mixtures in plantations, which form the backbone of the proposals, tend to be narrow, whereas the native forests are species rich. The indirect benefits of CDM projects, in terms of relieving pressure on protected areas, might be more important. The deforestation and degradation of forests is responsible for some 17 percent of greenhouse emissions. However, the Kyoto Protocol does not create a market for the abatement of emissions achieved by avoiding deforestation and degradation. A concrete result of the Bali climate change conference in December 2007 was the intent to develop a work program to develop mechanisms to reduce emissions from deforestation. The development of effective reward systems for storing carbon in existing forests will be a very difficult exercise given the complexity of the social, economic and political settings in the countries concerned. For example, land tenure arrangements need to be understood given that they have a great bearing on how and to whom the payments for sequestered carbon are to be made. Even if such a mechanism is adopted post-Kyoto, it could not be operational before 2013. (An analysis of the methodological and funding issues in REDD is in Chapter 8.) Meanwhile, non-government organizations and the World Bank are developing mechanisms for the delivery of carbon credits for avoided deforestation. These have the potential to prevent the irreversible loss of large carbon sinks and much biodiversity. However, the scale of the response will need to be very much greater than is presently promised if it is to match the pace of deforestation; unfortunately it appears inevitable that much biodiversity will be lost in the near future. Forestry is often a preferred option for investors in the voluntary offset market. But the standards that are being applied to plantations are concerned with validating the carbon sequestered, rather than demanding biodiversity co-benefits. Emerging cap and trade schemes in the United States are being urged by non-government organizations to approve forestry offset schemes that are based on native species and have more likelihood of delivering biodiversity gains.

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REFERENCES Australian Government (2006), ‘Approval of Greenhouse Friendly abatement projects’, Canberra, Australia: Australian Greenhouse Office. Australian Government (2008), ‘Carbon pollution reduction scheme: Australia’s low pollution future’, white paper, Department of Climate Change, Canberra, Australia, available at http://climatechange.gov.au/whitepaper/report/index.html. Barlow, J., T. Gardner, I. Araujo, T. Ávila-Pires, A. Bonaldo, J. Costa, M. Esposito, L. Ferreira, J. Hawes, M. Hernandez, M. Hoogmoed, R. Leite, N. Lo-Man-Hung, J. Malcolm, M. Martins, L. Mestre, R. Miranda-Santos, A. Nunes-Gutjahr, W. Overal, L. Parry, S. Peters, M. Ribeiro-Junior, M. da Silva, C. da Silva Motta and C. Peres (2007), ‘Quantifying the biodiversity value of tropical primary, secondary and plantation forests’, Proceedings of the National Academy of Sciences, 104(47), 18555–60. Bayon, R., A. Hawn and K. Hamilton (eds) (2007), Voluntary Carbon Markets: An International Business Guide to What They Are and How They Work, London/ Sterling, VA: Earthscan. California Climate Action Registry (2007), ‘Forest Sector Protocol’, Version 2.1, available at http://www.climateregistry.org/resources/docs/protocols/industry/ forest/forest_sector_protocol_version_2.1_sept2007.pdf. Caparrós, A. and F. Jacquemont (2003), ‘Conflicts between biodiversity and carbon sequestration programs: economic and legal implications’, Ecological Economics, 46, 143–57. Catterall, C. and D. Harrison (2006), Rainforest Restoration Activities in Australia’s Tropics and Subtropics, Cairns, Australia: Cooperative Research Centre for Tropical Rainforest Ecology and Management. CCBA (Climate Community & Biodiversity Alliance) (2008a), ‘Climate Community & Biodiversity Project Design Standards’, draft second edition, Version 1, 13 June, available at www.climate-standards.org. CCBA (Climate Community & Biodiversity Alliance) (2008b), ‘New hope for threatened Sumatran rainforest’, available at http://climate-standards.org/news/ news_feb2008.html. CBD (Convention on Biological Diversity) (2007), ‘Review of implementation of Articles 20 and 21 – review of availability of financial resources: A note to the Executive Secretary’, New York: UNEP. CBD (Convention on Biological Diversity) (2008a), ‘About the Convention’, available at http://www.cbd.int/convention/about.shtml. CBD (Convention on Biological Diversity) (2008b), ‘About the 2020 Biodiversity target’, available at http://www.cbd.int/2010-target/about.shhtml. DEFRA (Department of Environment, Food and Rural Affairs) (2007), ‘England biodiversity strategy – towards adaptation to climate change’, available at http://www.defra.gov.uk/wildlife-countryside/resprog/findings/ebs-climatechange.pdf. Department of Environment and Water (2007), ‘Mabi Forest’, available at http:// www.environment.gov.au/biodiversity/threatened/publications/mabi-forest.html. Ecosystem Marketplace (2008), ‘Painting the town REDD: Merrill Lynch inks massive voluntary forest deal’, available at http://ecosystemmarketplace.com/ pages/article.news.php?component_id55584&component_version_id58076 & language_id512.

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Emissions-Biodiversity Exchange (2008), ‘Key features of EBEX21 carbon credits’, available at http://www.ebx21.co.nz/other_issues.asp. Environmental Protection Agency (2007), ‘Mabi Forest (complex notophyll vine forest sb)’, available at www.epa.qld.gov.au/projects/redd/index.cgi. FAO (Food and Agriculture Organization) (2006), ‘Global forest resources assessment, 2005’, Rome: FAO. Government of New South Wales (2008), ‘Greenhouse gas reduction scheme’, available at http://www.greenhousegas.nsw.gov.au/. Hamilton, K., M. Sjardin, T. Marcello and G. Xu (2008), Forging a Frontier: State of the Voluntary Carbon Markets 2008, Washington, DC and New York: Ecosystem Marketplace and New Carbon Finance. Hunt, C. (2008), ‘Economic and ecological implications of credits for biosequestered carbon on private land in tropical Australia’, Ecological Economics, 66, 309–18. IPCC (International Panel on Climate Change) (2007), The Physical Science Basis, Fourth Assessment Report, Working Group 1, Cambridge, UK and New York: Cambridge University Press. IUCN (International Union for the Conservation of Nature) (2006), ’2006 IUCN Red List of Threatened Species’, available at http://www.iucnredlist.org. Jackson, M. (2007), ‘Minding the carbon store: a global benchmark for avoided deforestation projects’, available at http://unfccc.int/files/methods_and_science/ lulucf/application/pdf/070307jackson.pdf. Kanowski, J., C. Catterall and G. Wardell-Johnson (2005), ‘Consequences of broad scale timber plantations for biodiversity in cleared rainforest landscapes of tropical and subtropical Australia’, Forest Ecology and Management, 208, 359–72. Lindenmayer, D. and J. Fischer (2006), Habitat Fragmentation and Landscape Change, Collingwood, Australia: CSIRO Publishing. LINK (2008), ‘Policy briefing: forest policy and carbon sequestration in Scotland’, available at http://www.scotlink.org/pdf/LINKWTFBriefingForests CarbonSequestrationJan2008.pdf. Mapala (2007), ‘Ulu Masen’, available at http://mapala-je.blogspot.com/2007_12_ 01_archive.html. Millennium Ecosystem Assessment (2005), Ecosystems and Human Well-being: Biodiversity Synthesis, Washington, DC: World Resources Institute. Ministry of Agriculture and Forestry (2008), ‘Forestry in a New Zealand emissions trading scheme’, available at http://maf.govt.nz/climatechange/forestry/ ets/engagement/page-01.htm. Oregon Legislative Assembly (2001), ‘House bill 2201’, available at http://www. oregon.gov/ODF/PRIVATE_FORESTS/docs/EHB2200.pdf. Rainforest Alliance (2008), ‘Rainforest Alliance validates first carbon offset project to Climate, Community & Biodiversity Alliance standards in Indonesia’, available at http://www.rainforest-alliance.org/news.cfm?id5carbon_ccb. RGGI (Regional Greenhouse Gas Initiative) (2008a), ‘Comments on RGGI Draft Model issued March 25, 2006’, available at http://www.rggi.org/docs/tws_rggi_ model_rule%20_comments_final.pdf. RGGI (Regional Greenhouse Gas Initiative) (2008b), ‘Comments from the Pacific Forest Trust on the Regional Greenhouse Gas Initiative’, available at http:// www.rggi.org/docs/pft_comments.pdf. Tacconi, L. (ed.) (2007a), Illegal Logging: Law Enforcement, Livelihoods and the Timber Trade, London and Sterling, VA: Earthscan.

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Tacconi, L. (2007b), ‘Deforestation and climate change’, Policy Brief, Canberra, Australia: Crawford School of Economics and Government, Australian National University. Tüv Süd Group (2008), ‘Project design document, afforestation in grassland areas of Uchindile, Kilombero, Tanzania & Mapana, Mufindi, Tanzania’, netinform, the industry portal of the Tüd Süd Group, available at http://www.netinform. net/h2/Aktuelles.aspx. UNEP (United Nations Environment Programme) (2007), ‘GEO-4 Report: Global Environment Outlook, Biodiversity’, available at http://www.unep.org/geo/ geo4. UNEP (United Nations Environment Programme) Risoe (2008), ‘CDM pipeline spreadsheet’, available at http://cdmpipeline.org/cdm-projects-type.htm. UNFCCC (United Nations Framework Convention on Climate Change) (2006), Report of the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol on its first session, held in Montreal, 28 November – 10 December 2005, Part two: Action taken by the conference of the parties serving as the meeting of the parties to the Kyoto Protocol at its first session, New York: United Nations. UNFCCC (United Nations Framework Convention on Climate Change) (2008a), ‘Approved A/R methodologies’, available at http://cdm.unfccc.int/ methodologies/ARmethodologies/approved_ar.html. UNFCCC (United Nations Framework Convention on Climate Change) (2008b), ‘Facilitating reforestation for Guangxi Watershed management in Pearl River Basin’, available at http://cdm.unfccc.int/Projects/prosearch.html. United Nations (1998), ‘Kyoto Protocol to the United Nations Framework Convention on Climate Change’, New York: United Nations. United Nations (2007), ‘The Millennium Development Goals Report, 2007’, United Nations, New York, available at http://www.un.org/millenniumgoals. VCS (Voluntary Carbon Standard) (2008), ‘Voluntary carbon standard’, available at http://www.v-c-s.org. World Bank (2008), ‘The Forest Carbon Partnership Facility’, Washington, DC: The World Bank. World Resources Institute (2008), ‘The greenhouse gas protocol: The land use, land-use change, and forestry guidance for GHG project accounting’, available at http://www.ghgprotocol.org/standards/project-protocol. World Trade Organization (2008), ‘Legal texts’, available at http://www.wto.org/ english/docs_e/legal_e/legal_e.htm.

5.

Measuring the carbon in forest sinks

The reduction of greenhouse gas emissions is the aim of the Kyoto Protocol, which at the time of writing has been ratified by all industrialized countries except the US. The countries listed in its Annex B of the Protocol have agreed to reduce their collective emissions during 2008–2012 by an average of 5.2 percent relative to a 1990 baseline (United Nations, 1998). In-country policies to achieve Kyoto emission targets vary. They can include subsidies for switching to renewable energy or to low emission power generation, taxes on carbon emissions, caps on industrial emissions, or a mixture of measures. Where caps are applied, for example in the European Union’s Emission Trading Scheme, emission allowances are allocated to polluters which are less than industries’ current emissions; penalties for non-compliance are the incentive to abate emissions to comply with the cap. Annex B countries can purchase or sell emission allowances, which have a scarcity value, in a global market. The decision to purchase or sell allowances will depend on the costs of abatement relative to the cost of allowances. Making allowances tradable engenders efficiency into the process but does not affect the overall cap which is determined by the number of allowances issued. The reduction in greenhouse gas emissions achieved in the land use, land-use change and forestry sector are entered in a nation’s national accounts. Annex B countries can also offset a proportion of their emissions through projects that bio-sequester carbon in developing countries. The workings of the markets for carbon sequestered in forests are dealt with in Chapters 1, 2 and 3. The natural process responsible for the accumulation of carbon in the biomass of trees is photosynthesis, which removes carbon dioxide from the atmosphere. An understanding of the linkage between carbon dioxide removed and carbon sequestered in forests is important, given that the world’s carbon markets are in terms of carbon dioxide rather than carbon (see Box 5.1).

121

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BOX 5.1

CARBON, CARBON DIOXIDE AND CARBON MARKETS

Under Kyoto Protocol definitions, carbon bio-sequestration is by afforestation (A) on land that was not previously forested, or by reforestation (R) of land previously forested. In A/R projects carbon is incorporated or sequestered in the trees of the A/R plantations that replace other land uses. The net gain is the carbon accumulated with project less the carbon accumulated without project. Depending on Annex B countries’ greenhouse gas emissions policy frameworks, forestry projects may generate income directly by achieving measured emission reductions, and/or firms may be able to offset their emissions against the emissions reductions of forestry projects. Annex B countries have established registries that account for and record the greenhouse gas abatement by firms, and by forestry projects. Emission allowances and offsets are both expressed in terms of a common unit of one tonne of carbon dioxide equivalent (CO2e), where CO2e is the expression of the global warming potential of the major greenhouse gases in terms of their equivalence with CO2 (IPCC, 2007: Table 2.14, p. 212). Units of one tonne of CO2e are abated, or its equivalent in carbon (C) is sequestered: 1 tonne of C 5 3.67 tonnes of CO2e (this ratio being derived from the ratio of the molecular weights of CO2 (44) and C (12)). The adoption of CO2e as the common unit of measurement and trade is an essential prerequisite for the harmonization of global and in-country markets. There is another market for carbon dioxide equivalent (CO2e) outside the markets that are initiated by emission caps or taxes. These are the voluntary markets, where businesses, institutions or individuals are motivated by altruism, reduction of guilt or image considerations, or all three, to offset their emissions as part of a carbon-neutral strategy; they typically abate part of their emissions and offset the remainder that cannot be technically or economically abated.

5.1

THE NEED FOR MEASUREMENT

Given that global climate policy is predicated on limiting the increase in concentration of greenhouse gases in the atmosphere, and hence the rise in

Measuring the carbon in forest sinks

123

Area of productive forest plantations

Area of other wooded land

Area of primary forest –8

M hectares Source:

–6

–4

–2

0

2

4

Area of primary forest

Area of other wooded land

Area of productive forest plantations

–5.8

–3.3

2.2

FAO (2006: Table 1).

Figure 5.1

Annual average change in global forest area, 2000–2005

global temperatures, it is vitally important that the measurement of greenhouse gases abated and offset should be as accurate as possible. Moreover, for the market to function effectively, an offset of one tonne of CO2e should be equivalent to another, no matter how it is achieved, that is by adoption of new technology or by afforestation and reforestation (A/R) (see note 3). A large proportion of global carbon emissions are the result of land-use change over massive areas (see Figure 5.1) mainly through deforestation and degradation of primary forests. The contribution of deforestation is large compared with the sequestration achieved by A/R, but under the Kyoto Protocol there are no incentives to curb the destruction of forests. The need to refine methods of measurement of bio-sequestered carbon has taken on a new urgency since the Bali Climate Change Conference in November 2007 which endorsed the need to introduce incentives for the reduction of deforestation and forest degradation (REDD). One of the continual stumbling blocks to the introduction of such a formal policy, however, is the difficulty of measurement of the carbon retained in forests rather than released to the atmosphere after land-use change. This difficulty is exacerbated by the fact that most deforestation is taking place over vast tracts in tropical forests in developing countries. This brings the chapter to its purpose, which is to describe and review the methods by which the carbon dioxide being removed from the atmosphere by growing forests, and the carbon dioxide prevented from entering

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the atmosphere, is measured. First there is an introduction to developments in measurement.

5.2

DEVELOPMENTS IN MEASURING CARBON IN FORESTS

The Kyoto Protocol requires nations to estimate the quantity of CO2e emitted and the C sequestered during the first commitment period of 2008– 2012. Estimates of carbon sequestration in plantations at regional and national levels are needed by governments to evaluate success in meeting their international obligations on climate change. Reliable methods of estimation of carbon sequestered in plantations are also required at the project level. Investors require estimates of carbon for projects incountry, in developing countries for projects under the Clean Development Mechanism (CDM) of the (United Nations Framework Convention on Climate Change) UNFCCC, or in other Annex B countries in the case of Joint Implementation. To ensure that climate change policy objectives are being met and to create efficient markets it is imperative that a tonne of CO2e claimed to have been removed from the atmosphere by plantations or sequestered in the form of carbon in a tropical forest is in fact equivalent to a tonne of CO2e avoided by other projects. The estimation of the removal of carbon from the atmosphere by plantations faces several unique difficulties, however. The carbon in A/R is found in varying quantities in the stems of trees, depending on the density of the wood, and in branches, leaves and roots, as well as in understory vegetation. Under plantations, there may be a significant change in carbon in the litter on the forest floor and in soil carbon. Moreover, carbon is sequestered over time and may be at different rates in different locations for the same tree species, depending on environmental factors such as rainfall and soil type. There are also random threats to the integrity of plantations such as disease, pests, fire and cyclones, as well as periodic harvesting episodes, making timely measurement a necessity if estimates of carbon sequestered are to be reliable. The direct and accurate method for the estimation of the above-ground biomass in plantations is to harvest the trees, oven-dry them and to weigh the dry matter. A universal rule is applied in estimating the carbon in trees, that is, half the biomass. This ratio was confirmed by Gifford (2000) under Australian conditions. Root biomass is typically estimated to be 25 percent of above-ground biomass (Ulrich et al., 1981). The direct method of drying is, however, prohibitively destructive and time-consuming. Other more practical methods have been developed that extrapolate the results of measurement of standing trees.

Measuring the carbon in forest sinks

125

In Australia, a sophisticated Carbon Accounting Model for Forests (CAMFor) has been developed that integrates information from a range of sources in a ‘toolbox’ in the National Carbon Accounting System (NCAS). It combines remote sensing information from satellites, with local environmental data and user inputs, and employs sophisticated carbon accounting and modeling of land-use change (Australian Government, 2007). After a worldwide search for carbon measurement systems the Clinton Climate Initiative selected the NCAS as the platform for a global rollout in developing countries. The overall aim of the partnership between the Clinton Climate Initiative and the Australian Government is to develop the system for use in large-scale REDD projects in developing countries so that these can be linked with carbon trading markets. The system will be consistent with the guidance provided by the International Panel on Climate Change (IPCC) and will anticipate the future needs of the UNFCCC. A web-based data delivery system will allow free and open access to a vast array of data from satellites, aircraft and field measurements (Australian Government, 2008). The sophisticated methods of measuring forests such as remote sensing will be assessed later in the chapter. The next section is a case study of the estimation of carbon in north Queensland rainforest (see Figure 5.2 for study location) by both physical measurement of the standing forest and by use of Australia’s CAMFor.

Study area

Figure 5.2

The study area for the measurement of carbon in forest sinks is the Atherton Tableland in the Wet Tropics Region of north Queensland, Australia

126

5.3

Carbon sinks and climate change

MEASURING CARBON IN TROPICAL FORESTS OF NORTH QUEENSLAND

In 2007 a research project was begun by the author to find the amounts of carbon sequestered by tree plantations and old growth forests in tropical north Queensland. This information would allow the valuation of the carbon in plantations of different types and ages and in old growth forests and would provide information on the economic and financial implications for A/R of the markets developing for sequestered carbon. An active program of reforestation aiming at augmenting endangered ecosystems, providing wildlife corridors and improving water quality in streams and rivers, had been pursued for many years by north Queensland NGOs and the Queensland government.14 This has resulted in the establishment of plantations of different ages available for measurement. The plantations were planted with mixed rainforest species, typically 40 to 50, the seedlings having been grown from seeds drawn from the same provenance. The diversity of such plantations in the tropical north Queensland environment increases over time with the introduction of seeds by birds and mammals from adjacent intact old growth forests and it is expected that they will eventually come to approach the old growth forests in biological complexity. 5.3.1

Methodologies of Carbon Measurement

A crucial step in setting out to measure carbon in reforestation plots and old growth rainforest was to find an allometric equation that related physical measurements of Australian rainforest trees to their biomass content. A relevant equation, and one supported by the Australian Greenhouse Office, relating diameter of trees at breast height (DBH) (see Figure 5.3) to above-ground biomass is in Snowdon et al. (2000: Table 1.4). The equation is 1.896712.3698 (lnDBH).15 After stratification of reforestation plantations located in the area by age, the next task was to devise a procedure that would minimize sampling error for the stratified sites. To enable a sampling intensity to be ascertained that would deliver results with a 95 percent confidence level and with a confidence interval of 10 percent, that is the mean plus or minus 10 percent, plots were measured in a plantation that was in the middle of the age range (13 years since planting) of the plantations to be measured. Six plots of 10 meters × 10 meters were selected using random numbers on a map of the plantation that had been divided into 10 × 10 meter squares. All trees in the plots with a diameter at breast height (DBH) in excess of 5cm were measured. Analysis of the trial plot data gave the result that a sample of five

Measuring the carbon in forest sinks

Source:

127

Author’s photo.

Figure 5.3

Measuring the diameter at breast height (DBH) of trees in an old growth tropical rainforest in north Queensland

randomized plots would deliver the required level of accuracy. The procedure adopted is detailed in Appendix 5.A. In practice, the number of random plots per age stratum varied between three and six depending on the size of the plantation. A remnant of old growth rainforest was then added to the set of plantations for measurement and estimation of carbon content. A second part of the research project was to forecast carbon sequestration rates by the plantations and old growth forests using the predictive CAMFor in the NCAS. Inputted to the toolbox were the site coordinates, the type of forest (in this case mixed native species) and the treatment of the land pre- and postplanting, according to the typical methods adopted for reforestation in the area.16 The plantation is assumed to have established on land cleared before 1990, which makes it an eligible reforestation project under Kyoto Rules. The following carbon pools are forecast by CAMFor: ● ● ●

Biomass of tree (stem, branches, bark, fine and coarse roots, leaves and twigs); Soil (organic matter and inert charcoal); Debris (coarse and fine litter, slash, below-ground dead material).

128

Carbon sinks and climate change 300

250

Tonnes of C ha–1

200 C onsite total C in soil C in debris C in grass C in trees

150

100

50

y1989 y2000 y2011 y2022 y2033 y2044 y2055 y2066 y2077 y2088 y2099 y2110 y2121 y2132 y2143 y2154 y2165 y2176 y2187 y2198

0

Note: Carbon in the trees and debris increases with growth, while the soil carbon stock which fell after the initial clearing continues to deteriorate after planting. Source: Author’s compilation using The National Carbon Accounting System (Australian Government 2007).

Figure 5.4 Tonnes of carbon forecast to be sequestered per hectare in a 2008 reforestation of mixed native rainforest species (the land was cleared prior to 1989) replacing grassland in north Queensland Most of the carbon is in the biomass of the trees, which increases with growth of the forest. However, soil carbon and carbon in grass diminishes after the establishment of the plantation, as depicted in Figure 5.4. To aid the decision-making process of plantation developers, CAMFor is capable of exploring the interactions between parameters and sensitivities to uncertainty of carbon estimates. Variables such as weather, site characteristics and the effect of timing of plantation harvesting can be entered (Brack and Richards, 2002). 5.3.2

Additionality and Establishing a Baseline

The project was concerned with quantifying the additionality of C sequestered (or its equivalent in terms of net removal of CO2e from the atmosphere)

Measuring the carbon in forest sinks

129

by the reforestation projects. It was therefore necessary to estimate the sequestration that would have taken place under the land-use scenario pertaining without plantation establishment. The actual C removals within the plantation after establishment, less the C removals by the baseline scenario over the same period, constitute the additionality of the project. Figure 5.4 from the NCAS toolbox shows that changes in the carbon content of grass and debris are negligible. On the other hand, soil carbon makes up a large proportion of the onsite total, and changes with landuse change. Establishing a baseline thus required soil sampling in plots in agricultural land adjacent to and within plantations to be physically measured. Time restraints ruled out physical soil carbon analysis; the study thus fell back on CAMFor estimates of soil carbon loss when reforestation replaces agricultural land use. The results of the research are now reported here. 5.3.3

Results of Measurement in Reforestations and Old Growth Forests

Two of the 13 reforestation sites that were measured exhibited very poor growth and low biomass content. It was apparent that pre-planting or post-planting management at these sites had been deficient, and the plots were discarded. A comparison of results of measurement and modeling shows that there is considerable agreement between the carbon per hectare by DBH measurement in the 11 reforestations and the carbon in trees forecast by the toolbox: see Figure 5.5. The results suggest that confidence is warranted in the predictive ability of CAMFor in the NCAS toolbox. Only one site in old growth forest had been measured in the research so far and it was decided to expand the investigation of sequestered carbon in this type of forest. This investigation was facilitated by the availability of DBH measurements that had been carried out in a 64-hectare block of old growth rainforest, by R. Jensen (personal communication, 2007). It was found that the variability of the biomass and hence carbon between plots in old growth rainforest was far greater than the variability in mixed native species plantations; the standard deviation in tonnes of carbon per hectare in old growth plots was 142 compared with 30 in a 13-year-old mixed species plantation. This was caused by the greater variation in the size of trees measured in the old growth rainforest. R. Jensen identified 284 tree species in the eight 500m2 measured plots, and in one plot a single massive tree (Ficus obliqua) accounted for two-thirds of the plot’s biomass; the size of a typical Ficus obliqua is illustrated in Figure 5.6. The average C sequestered in the 64 hectares was 308 tonnes per hectare. Figure 5.7 shows the carbon found by measurement in the eight

130

Carbon sinks and climate change

Tonnes of carbon in trees ha–1

300 250 200 150 100 Toolbox Measured

50 0 0

50

100

150

200

250

Years since planting Notes: Reforestations were of different ages at 11 reforestation sites and at site 12 of old growth tropical rainforest (the 200-year estimate). Estimation was carried out both by use of the National Carbon Accounting System toolbox (CAMFor) and by physical measurement, in north Queensland. Source:

Author’s own data.

Figure 5.5

Estimation of carbon sequestered per hectare in reforestations

plots. Because of the perceived difference between the growth of forests across the terrain, the sample plots were distributed deliberately by Jensen between the ridge top, upper and lower slopes and gully bottom. The sampling procedure adopted achieved results with a 95 percent confidence limit and a confidence interval of 10 percent. 5.3.4

Value of Carbon in Measured Reforestations and Old Growth Forest

To obtain the value of carbon in the measured plantations it is converted to its equivalent in CO2e, to which a conservative value of US$10 per tonne is then applied.17 Table 5.1 shows the results of measurement in 11 plantations plus an old growth forest site. Table 5.2 shows that young plantations yield relatively little carbon value. If site number 5 is discarded as being atypical, then the results suggest an incremental annual value of carbon ranging between US$240 and US$308 per hectare for plantations between 7 and 18 years old. Table 5.3 shows that the carbon found by measurement in old growth forest has a notional value of over US$10 000 per hectare.18

Measuring the carbon in forest sinks

131

Note: The diameter at breast height (DBH) of such trees is measured above the buttresses. The sampling procedure must adequately represent such trees which can make up a large percentage of the biomass and the carbon in a sample plot. Source:

Author’s photo.

Figure 5.6

5.3.5

Ficus obliqua in the old growth tropical forest that was sampled and measured

Forecasting Carbon Sequestration in Commercial Plantations

The purpose of the mixed species plantations in the study area of the Atherton Tablelands of north Queensland is environmental, that is they are not intended for harvest. Where forecasting carbon sequestration in commercial plantations is necessary, the usefulness of the NCAS is further illustrated. Under Kyoto Protocol rules the carbon in trees is lost to the atmosphere at harvest. It is also necessary to account for the carbon lost in thinnings and prunings. Figure 5.8 shows the forecast by CAMFor of carbon sequestered in a north Queensland plantation of hoop pine (Araucaria cunninghamii) that is harvested and replanted. Modeling unharvested plantations enables a comparison of the benefit of forgoing the income from timber sales while gaining income from an

132

Carbon sinks and climate change Ridge top: Plot 1. 181; Plot 2. 319

Upper slope: Plot 1. 299; Plot 2. 295

Lower slope: Plot 1. 382; Plot 2. 151

Gully bottom: Plot 1. 607; Plot 2. 233

Notes: One tree (Ficus obliqua) with a diameter of almost 2 metres accounted for twothirds of the carbon in gully bottom Plot 1; sampling procedures need to take account of the variation in carbon across old growth tropical forests. The results provided an average results of 308 tonnes of carbon per hectare, with a confidence level of 95% and a confidence limit of 10%. Source:

Source of DBH data: R. Jensen, personal communication (2007).

Figure 5.7 Tonnes of carbon per hectare measured in sample plots stratified by terrain in an old growth rainforest in north Queensland

increase in carbon sequestered. The outcome of the comparison depends on the relative prices of timber and sequestered carbon, the relative costs of maintaining the plantation for harvesting and sequestering carbon, and the discount rate.19 Modeling may also take account of the fact that carbon is sequestered in timber products. Figure 5.9 shows the total onsite carbon forecast for a hoop pine plantation that is unharvested and harvested, and where 35 percent of the carbon in the harvested timber is sequestered in product. 5.3.6

Case Study Discussion

It was concluded in Chapter 3 that payments should only be made for carbon actually sequestered, as verified by tree measurement or by models, such as in the NCAS toolbox, in conjunction with measurement. A case study in north Queensland illustrated both the direct physical

Measuring the carbon in forest sinks

Table 5.1

Site number 1 2 3 4 5 6 7 8 9 10 11

133

Additionality of carbon sequestered in reforestations of mixed native rainforest species in north Queensland Years since planting

C t–1 ha in treesa

C t–1 ha in soilb

C t–1 ha additional

5 7 9 10 11 12 13 14 15 17 18

9 46 91 83 134 85 86 112 126 120 127

25 26 27 28 29 210 211 212 213 214 215

4 40 84 75 125 75 75 100 113 106 112

Notes: a Tree carbon is by measurement. b Soil carbon is by NCAS toolbox forecast. Source:

Author’s own data.

Table 5.2

Site number 1 2 3 4 5 6 7 8 9 10 11 Source:

Value of CO2e removed from the atmosphere by reforestation plantations Ct–1 ha additional

CO2e t–1 ha (C*3.67)

US$/ha at US$10/tonne

US$/ha/year

4 40 84 75 125 75 75 100 113 106 112

15 147 308 275 459 275 275 367 415 389 411

147 1468 3083 2753 4588 2753 2753 3670 4147 3890 4110

29 210 343 275 417 229 212 262 276 229 228

Author’s own data.

134

Carbon sinks and climate change

Table 5.3

Site number

Carbon sequestered and CO2e removal and value, old growth rainforest, north Queensland C t–1 ha

CO2e t–1 ha (C*3.67)

US$/ha at US$10/tonne

277 308

1017 1130

10166 11304

12a 13b

Notes: a Site 12 had suffered relatively high cyclone damage which could explain the lower level of C measured compared with site 13. b The source of Site 13 tree measurement data (DBH) is Jensen (personal communication, 2007). Source:

Author’s own data.

measurement of rainforest trees in plantations of different ages and the application of an allometric equation to the estimation of biomass and hence carbon sequestered per hectare. The carbon in old growth tropical rainforests was measured in the same way. These results were then compared with results obtained by the use of CAMFor in the NCAS toolbox (Australian Government, 2007) that is designed to forecast carbon sequestration in sites anywhere where trees can grow in Australia. The research thus provides an indication of net rate of accumulation of C in plantations and the value of carbon in plantations and old growth forests, and tests the relationship between results by allometric measurement and by using CAMFor. Future forecasts of estimates of carbon in forests of different ages and the standard deviation of these forecasts are very useful for governments for the purposes of carbon accounting and for the purposes of payments for CO2e removals. They are also invaluable for developers in making investment decisions with respect to forestry projects. However, the periodic ground-level measurement of plantations is also indispensible in verifying their carbon content. Forestry projects designed with the aid of the NCAS and verified by measurement at five-year intervals are eligible to qualify under the Australian government’s voluntary offset program and will also qualify under its carbon pollution reduction scheme. The measurement of plantations gave higher results than toolbox estimates. Part of the difference is explained by the fact that the measured plots were all fertilized, whereas the toolbox estimates were for unfertilized plantations. A second reason may be the choice of plantations with reasonable growth for measurement and the rejection of two poor plantations for inclusion in the comparison. An additional factor that may lead to the over-estimation of the carbon

Measuring the carbon in forest sinks

135

250 C onsite total C in soil C in debris C in grass C in trees

Tonnes of C ha–1

200

150

100

50

y2199

y2189

y2179

y2169

y2159

y2149

y2139

y2129

y2119

y2109

y2099

y2089

y2079

y2069

y2059

y2049

y2039

y2029

y2019

y2009

y1999

y1989

0

Note: At harvest the carbon in trees falls to zero. Prunings and thinnings are left on the forest floor, reducing the carbon in trees and increasing the carbon in debris which decays over time. Source: Author’s compilation using The National Carbon Accounting System (Australian Government, 2007).

Figure 5.8

Tonnes of carbon forecast to be sequestered per hectare in a 2008 reforestation by a monoculture of hoop pine (Araucaria cunninghamii) that is harvested and replanted after harvest

in plantations that are measured is the result of the adoption of a general practice in the study area of including a higher percentage of pioneer trees in mixed plantings than would be found in an old growth forest. This practice allows the canopy to develop quickly and to suppress weed growth. Pioneer species are usually less dense and contain less carbon than slower growing species. A refinement would be the tailoring of biomass estimates by the identification of species and their densities in measured plantations.

136

Carbon sinks and climate change 350 C unharvested 300 C harvested

Tonnes of C ha–1

250 C harvested and sequestered in product

200 150 100 50 0 0

20

40

60

80

100

120

–50 Years since planting Note: Hoop pine is either i) unharvested ii) harvested (and replanted after harvest), or iii) where the product is sequestered after harvest. Source: Author’s compilation using The National Carbon Accounting System (Australian Government, 2007).

Figure 5.9

Total tonnes of onsite carbon forecast to be sequestered per hectare in a 2008 reforestation by a monoculture of hoop pine (Araucaria cunninghamii)

Errors in the application of allometric equations have been estimated by Chave et al. (2004: 416), concluding that measurement uncertainty of 5 percent could be added to an uncertainty of 10 percent with respect to wood density. A conservative estimate of additional carbon could be thus obtained by deducting 15 percent from the estimates of the annual additional increment of carbon at each site in Table 5.1. The measurement of trees and soils in forests is labor-intensive and involves travel to sites and accommodation of professional personnel. One estimate of the costs of measurement based on a study in 325 hectares of plantation in northern New South Wales, Australia, is US$240 per hectare. This cost approximates the annual incremental value of carbon sequestered per hectare in this study; see Table 5.1. The costs may be able to be reduced, however, by the pooling of smaller plantations which would

Measuring the carbon in forest sinks

137

allow higher confidence limits to be achieved at a lower sampling level (Specht and West, 2003). 5.3.7

Research Conclusions

Accurate estimates of the CO2e removed from the atmosphere by plantations are required if markets are to be efficient. The study illustrates sampling and measurement techniques together with the application of an allometric equation, to obtain estimates of carbon sequestered in plantations of different ages and in old growth forests. It thus shows how measurement can be combined with a sophisticated modeling tool in the validation of carbon sequestration rates. The study alludes to the potential for the development and application of such methods and models as that in the NCAS, for application in REDD projects in developing countries.

5.4

MEASUREMENT PROTOCOLS

The two most comprehensive measurement protocols for A/R presently in use are those for the Clean Development Mechanism (CDM) and the World Resources Institute (WRI). The adherence to CDM protocols is a precondition for the issue of tradable certified emission reductions (CERs) under the Kyoto Protocol. Adherence to either of these protocols may be required for certification of emission reductions in the voluntary market. For example, the Voluntary Carbon Standard (2008) accepts existing methodologies under the CDM and, similar to CDM, Joint Implementation (JI). 5.4.1

The Clean Development Mechanism

The most comprehensive rules for the establishment of baseline and additionality for A/R are those of the CDM under the Kyoto Protocol. Project developers may use approved methodologies or submit a new methodology for approval. The methodologies for establishing the baseline and for monitoring carbon sequestration in projects must be specified in the project design documents. Independent auditing and validation of the actual net CO2e removals claimed for A/R projects is required for project certification. The issue of CERs by the Executive Board of the CDM follows certification. These methodologies and procedures for A/R projects can be found at UNEP Risoe (2008).

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Carbon sinks and climate change

The GHG Protocol

The GHG Protocol (WRI, 2005) contains a comprehensive guide to land-use change and forestry accounting concepts and principles. While it constitutes a very useful source of information for project developers, it may be sidelined as a protocol given the adoption of the CDM and JI rules by the Voluntary Carbon Standard, which seems set to become the most popular standard adopted in the voluntary market (this standard is reviewed in Chapter 3).

5.5 MEASURING STOCKS OF CARBON IN TROPICAL FORESTS: TOWARDS MAKING REDD A REALITY Deforestation in the tropics annually of almost 6 million hectares of primary forest and over 3 million hectares of wooded land is contributing more than 2000 TgCyr21 of carbon to the atmosphere (Houghton, 2003: Table 3). In total, deforestation is responsible for some 27 percent of total carbon emissions (Houghton, 2003: Table 6). The slowing of such deforestation would contribute to the stabilization of climate. Presently, however, the developing countries of the tropics, where most deforestation is taking place, receive little if any incentive to reduce deforestation. As discussed in Chapter 3, avoided deforestation was excluded from the first commitment period of the Kyoto Protocol 2008–2012 because of fears that it would crowd out mitigation efforts and weaken the market for credits. However, the UNFCCC agreed to study the inclusion of incentives for REDD, this commitment receiving a boost at the Bali Climate Change Conference in late 2007. But one of the stumbling blocks to the introduction of such a formal policy remains; that is the difficulty of measurement of the carbon retained in forests rather than released to the atmosphere after land-use change. A few countries have made inventories of their forests but on the whole existing data on national carbon stocks is of questionable quality (FAO, 2006). Action is needed by individual developing countries as well as by developed countries in the global application of new technologies. The chapter turns to reviewing steps that need to be taken towards the introduction of policy for REDD. 5.5.1

REDD and the Physical Measurement of Tropical Forests

Generalized allometric equations stratified by forest types have been found to explain most of the variation in above-ground carbon in tropical

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forests. The case study above illustrates a procedure for physically sampling stratified sites to give a certain level of sampling error, and the process of measuring and applying an allometric equation to the calculation of carbon stocks in plantations and old growth forests. Survey efficiency can be greatly increased by the establishment of a sufficient number of permanent plots which are measured at regular intervals. The stratification by forest types, such as evergreen broadleaf or semideciduous dry forest as well as by their condition, for example primary, logged or secondary, further increases survey efficiency, carbon stocks being estimated for each forest stratum. A survey matrix can then be built up of carbon stocks by strata at the country level (Gibbs et al., 2007). Developing countries may find that such comprehensive ground-based inventories can be developed economically. However, deforestation is high in the least developed countries. Where resource constraints preclude sampling throughout a country’s forests, data for typical strata can then be used to develop models that will predict carbon stocks for any given forest stratum. Web-based data delivery systems would allow free and open access to the collated data for forest strata derived from field measurements. 5.5.2

REDD and Remote Sensing

It is important to establish how much forested countries in the tropics have been losing as well as how much they still have. The rates of deforestation in the past are a baseline against which the contemporary rate and future rates can be compared. Developing countries can then be compensated for the deforestation avoided. Where cloud cover is not a problem, optical satellite data, for example from MODIS, Landsat and SPOT, identify changes in forest area, but only at coarse or medium resolution. They can not identify more subtle changes in forests due to degradation or recovery. For example, regrowing forest in the tropics may exhibit a dense tree cover but composed mainly of pioneer trees with much lower carbon stocks than the original forest. A new era is claimed for remote sensing with the operation of the ALOS satellite. This uses radar sensing and has the unprecedented ability to deliver high-resolution (~20 meters), regional- to continental-scale image acquisitions over short time frames (6–8 weeks), through dense cloud cover and precipitation, and day and night (Woods Hole Research Centre, 2007). 5.5.3

The Way Ahead

It cannot be emphasized enough that satellite data, no matter how accurate in resolution, must be linked to ground-based estimates of the forest

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carbon stocks in areas prior to their deforestation or degradation. This information would be available if carbon stock data had been recorded in plots established in forested and deforested areas or, if ground-based data were available, for similar strata. It is unlikely that there is sufficient time to gather a great deal more field inventory data before the Kyoto first commitment period expires in 2012. Therefore it is imperative that the approach recommended by Gibbs et al. (2007) and Olander et al. (2008) is followed to make the most of existing data available: 1. 2. 3. 4. 5.

Compile existing broad forest data across the tropics by forest type and condition. Link satellite imagery with strata of forest type and condition. Apply the carbon stock data to strata identified from the imagery. Carry out sampling of strata identified by imagery for which data is deficient. Ensure transparency of accuracy/error of data.

Grant programs will be crucial to assist developing countries in using a combination of data and technology in developing comprehensive ‘wall to wall’ information on carbon in forest strata and rates of deforestation. Unless such credible scenarios can be developed for tropical deforesting countries, REDD will not become a reality.

REFERENCES Australian Government (2007), ‘The national carbon accounting toolbox and data viewer’, Canberra, Australia: Department of Environment and Heritage and Australian Greenhouse Office. Australian Government (2008), ‘Carbon pollution reduction scheme: Australia’s low pollution future’, white paper, Department of Climate Change, available at http://climatechange.gov.au/whitepaper/report/index.html. Brack, C. and G. Richards (2002), ‘Carbon accounting model for forests in Australia’, Environmental Pollution, 116, 187–94. Brown, S. (2002), ‘Measuring carbon in forests: current status and future challenges’, Environmental Pollution, 116, 363–72. Catterall, C. and D. Harrison (2006), Rainforest Restoration Activities in Australia’s Tropics and Subtropics, Cairns, Australia: Cooperative Research Centre for Tropical Rainforest Ecology and Management. Chave, J., R. Condit, S. Aguilar, A. Hernandez, S. Lao and R. Perez (2004), ‘Error propagation and scaling for tropical forest biomass estimates’, Tropical Forests and Global Atmospheric Change, Philosophical Transactions of the Royal Society B: Biological Sciences, 359, 409–20.

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FAO (Food and Agriculture Organization) (2006), ‘Global forest resources assessment, 2005’, Rome: FAO. Gibbs, H., S. Brown, J. Niles and J. Foley (2007), ‘Monitoring and estimating tropical forest carbon stocks: making REDD a reality’, Environmental Research Letters, 2(4), available at stacks.iop.org/ERL/2/045023. Gifford, R. (2000), ‘Carbon contents of above-ground tissues of forest and woodland trees’, National carbon accounting toolbox technical report no.7, Canberra, Australia: Australian Greenhouse Office. Hamilton, K., M. Sjardin, T. Marcello and G. Xu (2008), ‘Forging a frontier: State of the voluntary carbon markets 2008’, Washington, DC/New York: Ecosystem Marketplace/New Carbon Finance. Houghton, R. (2003), ‘Revised estimates of the annual net flux of carbon to the atmosphere from changes in land use and land management 1850–2000’, Tellus, 55B, 378–90. Hunt, C. (2008), ‘Economy and ecology of emerging markets and credits for biosequestered carbon on private land in tropical Australia’, Ecological Economics, 66, 309–18. IPCC (International Panel on Climate Change) (2007), The Physical Science Basis, Fourth Assessment Report, Working Group 1, Cambridge, UK and New York: Cambridge University Press. Olander, L., H. Gibbs, M. Steininger, J. Swenson and B. Murray (2008), ‘Reference scenarios for deforestation and forest degradation in support of REDD: a review of data and methods’, Environmental Research Letters, 3(2), 2–11. Pearson T., S. Walker and S. Brown (2005), Sourcebook for Land Use, Land Use Change and Forestry Projects, Washington, DC: BioCarbon Fund and Winrock International, World Bank. Snowdon, P., D. Easmus, P. Gibbons, P. Khanna, H. Keith, J. Raison and M. Kirschbaum (2000), ‘Synthesis of allometrics, review of root biomass and design of future woody biomass sampling strategies’, National carbon accounting toolbox technical report No. 17, Canberra: Australian Greenhouse Office. Specht, A. and P. West (2003), ‘Estimation of biomass and sequestered carbon on farm forest plantations in northern New South Wales, Australia’, Biomass and Bioenergy, 25, 363–79. Ulrich, B., P. Benecke, W. Harris, P. Khanna and R. Mayer (1981), ‘Soil processes’, in D. Reichle (ed.), Dynamic Properties of Forest Ecosystems, Cambridge: Cambridge University Press, pp. 265–337. UNEP (United Nations Environment Programme) Risoe (2008), ‘CDM Rulebook’, available at http://cdmrulebook.org. United Nations (1998), ‘Kyoto Protocol to the United Nations Framework Convention on Climate Change’, New York: United Nations. VCS (Voluntary Carbon Standard) (2008), ‘Voluntary Carbon Standard, guidance for agriculture, forestry and other land use projects’, available at http://www.vc-s.org/docs/AFOLU percent20Guidance percent20Document.pdf. Woods Hole Research Centre (2007), ‘Global forest monitoring from space to be strengthened’, available at http://www.whrc.org/pressroom/press_releases/ PR-2007-11-20-Alos-Xingu.htm. World Resources Institute (2005), ‘Greenhouse gas protocol: The land use, landuse change, and forestry guidance for GHG project accounting’, Washington, DC: World Resources Institute.

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APPENDIX 5.A The procedure for finding the number of sample plots to give a 95 percent confidence level and a 10 percent confidence limit for a stratum of a same-age plantation was as follows: The DBH measurements of all trees >5cm, in six 10m2 randomized plots in the plantation was recorded. The allometric equation 1.896712.3698 (lnDBH) (source: Snowdon et al., 2000: Table 1.14) was applied to the DBH measurements to find the biomass in trees and plots and the biomass per hectare for each plot. Carbon ha21 5 0.5 × biomass ha21, as reported in Table A5.1. The formula applied to find the optimum number of plots to be randomly sampled is: n 5 (N 3 s)2/ ((N 2 3 E 2/t2) 1 (N 3 s2))

(5.1)

where: n 5 the number of sampling units or plots; E 5 the desired confidence interval (0.1 for 10 percent interval); t 5 the sample statistic from the t-distribution for the 95 percent confidence level (set at 2 for an unknown sample size); N 5 number of sampling units for the stratum, which is area of the stratum divided by the area of the plots; s 5 standard deviation in stratum (Pearson et al., 2005: 16). The area of the plantation is 10 hectares. The size of plots is 0.01 hectares. The standard deviation of the carbon per hectares in sample plots (from Table A5.1) is 29.69. Inserting this data in equation (5.1) gives n 5 5: that is, 5 plots are

Table A5.1

Carbon per hectare by measurement in six sampled plots

Plot number

C t–1 ha

1 2 3 4 5 6

90.57 89.38 56.07 132.48 52.32 99.70

Source:

Author’s own data.

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143

required to be randomly sampled in this plantation to provide an estimate of the carbon in the whole plantation with a confidence level of 95 percent and with a confidence limit of 10 percent.

6.

Forests as a source of biofuels

For thousands of years wood has been a major energy source. But in developed countries fossil fuels have become dominant, with renewables making up only 3.9 percent of all fuels in terms of oil equivalents in 2007 (International Energy Agency, personal communication, 2008). In contrast, in many developing countries wood remains the predominant household fuel for cooking and heating. Of the renewables, wood is second only to hydropower in importance globally (see Table 6.1). One of the ways that biomass, provided by plants or forests, can contribute to tackling climate change is as a source of liquid fuel to replace fossil fuels used in transport. Before undertaking an investigation of what might be the specific future role for forests in providing renewable energy, it is necessary to examine in some depth the global trends in overall biofuel production, presently dominated by annual crops. Biofuels cost more than other forms of renewable energy but they are the only form that can address the challenges of the transport sector, including its almost complete reliance on oil and the fact that greenhouse reductions in this sector are difficult to obtain. Both the US and the EU have announced policies designed to greatly increase the contribution that biofuels20 make to the energy requirements of transport, summarized in Box 6.1. Biofuels require large subsidies to be competitive. Governmentsupported policies could lead to an increase in the share of biofuels in global transport from 1 percent to 6 percent in 2020 (World Bank, 2008a: 2). The willingness of governments to support biofuel production has four main drivers: First, industrial nations, as typified by the US and EU members, are heavily reliant on imports of crude oil to fuel their large transport sectors. This makes their economies vulnerable to supply shortages caused by the depletion of global oil reserves or by political instability in oil-rich regions. Second, the biofuels are expected to effect a saving in greenhouse gases, which is an important criterion given that all major countries except the US have ratified the Kyoto Protocol and are committed to reducing their emissions during 2008–2012 and beyond.

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Table 6.1

World renewable energy consumption Quadrillion BTU

Biomass Biofuels Waste Wood derived fuels Geothermal energy Hydroelectric conventional Solar/Photovoltaic energy Wind energy Total Source:

145

3.277 0.758 0.404 2.114 0.349 2.89 0.07 0.258 6.844

Change 2006/2005 (%) 6.2 27.6 0.3 20.1 1.8 6.9 6.5 45.1 6.9

Energy Information Administration (2007: Table 1).

Third, the volatility of feedstock prices and energy input prices. Fourth, biofuel-supporting policies will boost rural net farm incomes and employment opportunities in regional areas.

6.1

TYPES OF BIOFUELS

The most common type of biofuel is bioethanol, made by fermentation and distillation of sugar and starch. No engine modifications are needed in cars for blends of petrol and 10 percent ethanol. In the US the main feedstock is corn, in the EU sugar beet, feed wheat and barley, while in Brazil it is sugarcane. While biodiesel makes up only 5 percent of biofuel production it is important in Europe where diesel is in increasingly short supply and where increasing the diesel/gasoline ratio is costly for refineries. Biodiesel is made mainly from rapeseed in Europe and soybeans in the US. Figures 6.1a and 6.1b show the regional sources of ethanol and biodiesel production in 2006. The above biofuels are conventional or first generation types. The socalled second generation biofuels are made from any kind of biomass, including for example forest or crop residues, which are generally cheaper sources than dedicated energy crops. The principal advantage of second generation biofuels is the saving on fossil fuels in their production. The substitution of corn ethanol for fossil fuels requires, on average, 19 percent less fossil fuels than burning gasoline.21 In contrast, using ethanol from cellulose, such as straw and hybrid poplar, substitutes

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BOX 6.1

US AND EU TARGETS FOR BIOFUELS

The President’s 2007 State of the Union Address (Bush, 2007) urged Congress to agree to increase the supply of renewable and alternative fuels by setting a mandatory Renewable Fuels Standard requiring 35 billion gallons of renewable and alternative fuels in 2017. This was nearly five times the 2012 target already in law. The Energy Independence and Security Act of 2007 already required 36 billion gallons of renewable fuel by 2022. In 2017, the President’s plan would displace 15 percent of projected annual gasoline use. A 10 percent substitution of petrol and diesel is estimated to require 43 percent of current cropland area of the US (International Energy Agency, 2004). It has been estimated (Perlack et al., 2005; US Department of Energy, 2008a) that there will be sufficient biofuel feedstock to meet the projected demand from several sources: ● ● ●

Crop residues, presently unused; Grains, mainly through large increases in yield; Perennial crops (grasses and trees) on cropland, idle cropland and cropland pasture.

In the case of Europe, the European Council has agreed to a target of 20 percent share of renewable energies in overall European Community fuel consumption by transport in 2020. The specific target for biofuels is 10 percent of total fuel consumption by transport by 2020. The target is conditional on the production being sustainable and second-generation biofuels (those using cellulosic sources) becoming commercially available. However, this rate of substitution will require 38 percent of current cropland in the EU (International Energy Agency, 2004). The growth in the EU will be in bioethanol and biodiesel. Domestically grown cereals and tropical sugarcane would be the main ethanol feedstocks, complemented later by cellulosic ethanol from straw and wastes. Rapeseed oil, both domestically grown and imported, projected to remain the main biodiesel feedstock, complemented by smaller quantities of soy and palm oil and later by second-generation biofuels, mostly from farmed wood (Commission of the European Communities, 2007).

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147

European Union 4%

Other 8%

United States 46% Brazil 42%

140 billion liters Source:

F.O. Licht Consulting Company (2007) cited by the World Bank (2008b).

Figure 6.1a

Ethanol production by region, 2006

Other 12% United States 13%

European Union 75%

6.5 billion liters Source:

F.O. Licht Consulting Company (2007), cited by The World Bank (2008b).

Figure 6.1b

Biodiesel production by region, 2006

for 92 percent of gasoline energy, according to Wang et al. (2007: Figure 11). Another advantage is the possibility of using waste biomass to generate the heat necessary for the second generation thermochemical production process.

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A disadvantage of second generation processes is that the investment costs in plant are high. In Europe the cost of producing biodiesel is $155 per barrel and second generation production $235 per barrel (Edwards, 2008). Moreover the large-scale plants may face difficulties with supply and transport cost of materials. However, recent research results suggest that costs could fall in the future. The next sections highlight the large rise in biofuel production in recent years and how research promises expanded production and lower costs.

6.2

THE RISING TIDE OF BIOFUELS

The sustained rise in world oil prices has made renewable energy more cost-competitive. Previous oil price increases have tended to spike but then subside without having provided sufficient stimulus for large-scale private and public capital investments in plant and equipment for the production of biofuels. The rise in oil prices and the attendant increase in the production of biofuels from 1999 to 2006 are illustrated in Figure 6.2. The higher oil prices coincided with maturing technology for the production of biofuels. The increase in world biofuel production in 2006 over 2005 was 27.6 percent (Table 6.1). While in the short term, prices may continue to fluctuate, in the long term they are likely to do so around a higher average price. In the US in 2001 the discovery that methyl tertiary butyl ether (used 40000

30000 25000

Other liquid biofuels Biodiesel Biogasoline Oil price

60 50 40

20000 30

15000

20

10000

Oil price, US$ per barrel

Biofuels production, Kt

35000

70

10

5000 0

0 1999 2000 2001 2002 2003 2004 2005 2006

Sources:

International Energy Agency, personal communication, 2008; BP (2008).

Figure 6.2

World biofuels production, 2000–2006, and West Texas Intermediate oil spot price

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as an additive in reformulated gasoline) was polluting groundwater led several states to ban its use, which led to its replacement by ethanol. The 2005 Energy Policy Act established a renewable fuel standard that increased the mandated use of renewable ‘efuels’ including ethanol and biodiesel from 4 billion gallons in 2005 to 7.5 billion gallons in 2012. By the end of 2006 fuel ethanol use in the US had already reached almost 5 million gallons, far exceeding the mandate in the Act. President Bush’s 35 billion gallon Renewable Fuels Standard will further increase present production by a factor of five by 2022. In 2000 US biodiesel production was 2 million gallons; anticipated production by 2010 as a result of policies adopted is 680 million gallons. The increase in biofuel production in the US, the EU and most other producing countries has been driven by subsidies and mandates. In all there are about 200 support measures that cost between $5.5 billion and $7.5 billion a year in the US and reflect the support of $0.38 to $0.49 per liter of petroleum equivalent for biofuels (World Bank, 2008a: 2). The EU has a specific tariff of €0.192 per liter of ethanol and an ad valorem duty of 6.5 percent on biodiesel. Member states can also exempt excise taxes on biofuels. A common policy tool is to mandate the blending of biofuels with fossil fuels. Brazil goes beyond all other countries with a blending requirement of 25 percent of ethanol. In addition there are tax incentives favoring ethanol and for the purchase of vehicles that run on blends or pure ethanol. In the longer term the development of second generation biofuels using existing cellulosic feedstocks is said to be capable of producing 30 percent of current fuel needs by 2030. The impact on regional America by widely dispersed production and ownership of the new industrial infrastructure will be profound. This growth is said to represent an ‘[H]istoric opportunity for wealth creation in rural communities, both in the US and around the world’ (Dorr, 2008: 1). 6.2.1

Commercialization of New Technology

Acceleration of the commercialization of new technology is by tax breaks incentives and tariffs. The US provides a $0.51 per gallon tax refund for blenders of ethanol and $1.00 per gallon for biodiesel from vegetable oil. Federal incentives are also provided for small biofuel plants. Domestic industries are commonly protected by tariffs on ethanol imports, which in the US are 25 percent, and up to 45 percent in the EU. Given the potential for second generation cellulosic ethanol, sourced from wood chips, wood waste and residues to raise yield dramatically, many other countries are subsidizing its commercial application (Coyle, 2007). Recent scientific breakthroughs suggest that the present high costs will

150

Sources:

Carbon sinks and climate change

Image courtesy of the University of Georgia Research Foundation.

Figure 6.3

Wood pellets used to make biofuel

be reduced for the production of second generation fuels. The derivation of oils from wood has long been possible but the inexpensive processing of the oil for use in engines has not. A team of researchers at the University of Georgia developed a new process that treats the oil so that it can be used in unmodified diesel engines or blended with biodiesel or conventional diesel. Wood pellets are heated in the absence of oxygen to produce charcoal and gas (pyrolysis); (see Figure 6.3). The gas is condensed and chemically treated. Research is underway to increase the fraction of oil derived from wood (Garcia-Perez et al. 2007). Another team of researchers at the University of MassachusettsAmherst, also using the pyrolysis method, have been able to directly convert plant cellulose to a liquid that can be used in gasoline engines on the road now or that can be blended. The feedstock is any woody biomass, such as the inedible portion of food crops and wood from trees (The Scientist Community, 2008). The inroads into the crude oil market by bioethanol and biodiesel from first generation plants are presently minor, and limits to land that can be switched to biofuels without large impacts on food prices are already approaching. The need for scientific breakthroughs and commercialization of new processes that increase the range of feedstocks that can be used in the commercial production of biofuels, is illustrated by the large gap between a business-as-usual scenario and President Bush’s target of ‘20 in 10’. If 30 percent of the corn crop is devoted to bioethanol in 2017 (27 percent in 2007) it will produce 12 billion gallons. If 23 percent of the soy

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151

40

Billions of gallons

35 30 25 Deficit

20 15 10 5 0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Deficit Biodiesel Corn ethanol

0

22.3

0.5

0.7

9

12

Note: Cellulosic sources, for example crop wastes and forests, are expected to contribute to reducing the projected deficit in achieving President Bush’s goal of producing 35 billion gallons of biofuels by 2017. Source:

Collins (2008).

Figure 6.4

US production of biofuels in 2007 and projected for 2017

crop is devoted to biodiesel in 2017 (17 percent in 2007) it will produce 700 million gallons (Collins, 2007). These combined will still leave a deficit of 22 billion gallons to be met from sources other than grains, as illustrated in Figure 6.4. The Energy Independence and Security Act of 2007 requires 21 of the 35 billion gallon target to come from ‘advanced fuels’ or second generation biofuels from non-edible plant sources. These sources include crop residues, perennial crops, forest fuel treatment and logging residues, and animal manures (Perlack et al., 2005). While the developments on the technical side of biofuels production may be exciting, there needs to be a countervailing examination of the social costs of large biofuel increases.

6.3

THE SOCIAL COSTS OF INCREASES IN BIOFUEL PRODUCTION

High food prices led to violent riots in 21 countries and non-violent riots in 44 countries according to the International Food Policy Research Institute

Carbon sinks and climate change

Commodity food price index, 2005 = 100

152 200 180 160 140 120 100 80 60 40 20 0

2000- 2001- 2002- 2003- 2004 2005- 2006- 2007- 2008Jan Jan Jan Jan Jan Jan Jan Jan Jan

Source:

IMF (2008).

Figure 6.5

World food prices

(IFPRI) (von Braun, 2008). Figure 6.5 charts the IMF’s commodity food price index since 2000. The World Bank has highlighted the problem of rising food prices: ‘Based on a very rough analysis, we estimate that a doubling of food prices over the last three years could potentially push 100 million people in low-income countries deeper into poverty’ (Zoellick, 2008). Some authorities are in denial about the role of biofuels as a major driver of the increase in food prices (US Department of Energy, 2008a). But the analysis of many authoritative commentators has laid much of the blame at the door of subsidized biofuels production using food grains and oilseeds. The IFPRI, for example, estimated that the biofuel demand increase between 2000 and 2007 accounted for 30 percent of the increase in weighted average grain prices. Mitchell (2008: 17) estimates that 70 to 75 percent of the increase in food commodity prices between June 2002 and 2008 to be due to biofuel production, together with the related consequences of large land-use shifts, speculative activity and export bans. Mitchell (2008) suggests that the increase in land area devoted to maize and oilseeds for biofuels prevented an expansion of wheat production that would have alleviated the declines in wheat stocks and the resulting rise in wheat prices. The large increase in the price of rice was largely a response to the rise in wheat price rather than to a change in rice production or stocks. To contain domestic price increases caused by the switch to biofuel production, many countries placed bans or restrictions on grain exports, which further forced up grain prices. Without the subsidization, mandates and tariffs of the US and the EU,

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biofuel production would have been lower and food commodity prices increases smaller. The balance of the price increase can be explained by a combination of higher energy prices and the related increases in fertilizer prices and transport costs, as well as the weakness of the US dollar. Brazilian ethanol production is at a much lower cost than in the US and EU and its increase has not raised sugar prices because sugarcane production has grown fast enough to meet the demand for sugar and ethanol. Removing the tariffs in the US and EU would enable Brazil and many African countries to produce ethanol profitably for export (Mitchell, 2008). The chapter continues to review the costs and benefits of biofuels by considering the climate change implications of increases in global biofuel production, including from forests.

6.4 IS GREENHOUSE GAS ABATEMENT ACHIEVED BY BIOFUELS? A major benefit claimed for the replacement of fossil fuels by biofuels is their potential to reduce (GHG) emissions. This claim needs to be subject to rigorous analysis because GHG savings depend on whether a simple life-cycle approach is taken to their estimation or a wider approach that recognizes the fact that the markets for biofuels are global. This analysis divides GHG emissions from biofuels into direct: the savings incurred by replacing fossil fuels by growing and processing crops to deliver biofuels at the pump in the US and EU, and indirect: the impacts on GHG emissions elsewhere of US and EU biofuels policies. A comprehensive analysis by Wang et al. (2007) in the case of corn ethanol in the US shows that GHG savings are profoundly influenced by the method of production and in particular by how the process is fuelled. If the plant is fired by coal then there is net increase in emissions compared with gasoline. Using natural gas together with by-products such as distillers’ grains or wood chips as fuel sources reduces emissions compared to gasoline by 40 to 50 percent. The current average GHG reduction in corn ethanol plants is 19 percent (Wang et al., 2007: Figure 11). Wang et al. (2007) conclude that the methods that are economical with respect to GHGs and energy should be identified and promoted. They suggest that the use of cellulosic feedstock in second generation plants, which cut emissions by 86 percent, may in fact represent the long-term sustainable ethanol pathway (Wang et al., 2007: Figure 11). In the EU the direct savings in GHGs by growing biofuels are positive and similar in dimension to those in the US; savings of 20 to 35 percent are

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achieved by conventional means. Using dried distillers’ grains as a supplement to combined heat and power energy source raises the savings to 50 percent compared with gasoline. Biodiesel savings of GHGs are higher, at between 50 and 60 percent (Joint Research Centre, 2008: Appendix 1). Nitrous oxide from the cultivated soils in growing feedstock for biodiesel in the EU is a major contributor to GHGs. The variation from field to field can be 100 times, depending on soils’ organic matter content. This means that the error range of the above estimates of GHG savings of biofuels from crops is wide. As in the case of the US, the use of cellulosic feedstock (in the form of straw) stands out, with a saving of about 70 percent. Given that capital is always a limiting factor, a way of looking at the effectiveness of biofuels in reducing direct GHG emissions is to examine the cost per tonne of carbon dioxide equivalent (CO2e) emissions avoided. Edwards (2008) shows that biofuels are a very expensive avoidance mechanism with costs of conventional bioethanol at €200–300 per tonne of CO2e at best and biodiesel at €175. The cost of avoidance by producing liquid fuels from wood is €250 per tonne of CO2e, while second generation processes using ethanol from straw are only slightly cheaper. Costs of all methods were well above the EU trading price for a tonne of CO2e of around €20. Land is also a limiting factor in biofuels production. Edwards (2008) shows that using wood directly for electricity production is about equal to the savings by processing the wood to liquid fuel and superior to biofuels from annual crops. However, such a use of wood does not solve the problem of the need to replace liquid fossil fuels. The above analysis concerns direct savings of GHGs; the total savings are more likely to be negative if indirect savings are included, as the next sections illustrate. 6.4.1

Globalization, Biofuels and GHGs

The major feedstocks of biofuels are maize in the United States and rapeseed in the EU. All grains and oilseeds (or cooking oil) are storable and easily transported, and the large global market has been traditionally supplied by EU and US exporters. The other characteristic of the market is the ready substitution that takes place between grains and oilseeds. If one of the major export crops such as maize is scarce and rises in price then more of the close substitutes such as wheat and rice will be used and their price may also rise triggering increases in supplies. Steady productivity gains have tended to keep grain prices low, even in the face of an increase in world population. The key to understanding the social and environmental impacts of an increase in subsidies for biofuels production from annual crops in the US

Forests as a source of biofuels

Table 6.2

155

Impacts of subsidizing biofuels production in the US and EU

Market Impacts

Social, GHG and Environmental Impacts

Subsidies in the US and EU raise the price of corn and rapeseed oil and divert production to biofuels

r A change in land use with more land devoted to maize for ethanol in the US and to rapeseed for biodiesel in the EU

p

Direct impacts

r A reduction in the amount of maize and rapeseed oil entering global food markets

r A rise in the global prices of grains and cooking oils

r A change in land use in other countries with an increase in the land area producing grains and cooking oils to supply global markets

p

Indirect impacts

and EU is the recognition of the ‘knock-on’ effect of subsidies in the US and EU. Table 6.2 shows how markets are interconnected and how subsidies have direct and indirect social, GHG and environmental impacts. The social impacts of subsidization policies on other countries are difficult to escape given the well publicized food riots. But analysis of the environmental and GHG implications of biofuel subsidies has been mainly of the direct kind until recently. Two examples serve to underline land-use change impacts of biofuel subsidies, or indirect impacts. The first concerns deforestation in the Amazon Basin. The net returns to US farmers from corn increased from around $125 per acre to $325 per acre in 2007 (Collins, 2007). This prompted an increase in US corn production but a fall in soybean production in 2007 of 19 percent and a consequent price rise of soybeans of 38 percent in 2007, over the 2006 price, and 84 percent over the 2005 price (US Department of Agriculture National Agricultural Statistical Service, 2008). The area deforested for cropland and the price of soybeans in the

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same year are highly correlated in the Brazilian Amazon (Morton et al., 2006). Deforestation rates and fire incidence increased sharply in 2007 in the main soybean-producing states in Amazonia (Laurance, 2007). The second example is of deforestation in Malaysia and Indonesia. The replacement of 10 percent of EU diesel consumption by biodiesel by 2020 would use 19 percent of world vegetable oils and cause an estimated price rise of 24 percent. A consequent increase in palm oil production will take place in Indonesia and Malaysia on forested lands and peat lands (Edwards, 2008). 6.4.2

Indirect GHG Impacts of Biofuels Policies

Given the global nature of the market for agricultural commodities, global agricultural models are required to measure the indirect GHG implications of biofuels. The results of selected models are now reviewed. A study of impacts of US corn-based ethanol production found that, instead of generating 20 percent savings in GHG emissions, it nearly doubles them over a 30-year period. Forest and grassland conversion that released large quantities of GHGs was accelerated by the higher crop prices. Brazilian sugarcane ethanol is credited with high direct savings of GHGs because bagasse, the waste product of crushing, is used to fuel the process. Nevertheless, GHGs will increase if Brazilian ranchers displaced by sugarcane convert more forest to pasture (Searchinger et al., 2008). Another global study by Fargione et al. (2008) showed how carbon debts were incurred by the clearing of rainforests, peatlands, savannahs or grasslands to produce biofuel crops in Brazil, south-east Asia and the US. The CO2e releases were 17 to 240 times more than the annual reductions that these biofuels would provide by displacing fossil fuels. Edwards (2008) concluded that emissions from the production of palm oil induced by the EU’s biofuels policy can negate all of the EU’s GHG reductions from biofuels. 6.4.3

Second Thoughts on Biofuel Policies

In reviewing whether EU biofuels policy would achieve its objectives, the Joint Research Commission (2008) of the European Commission came to the following conclusions: ●

Security of supply: Fossil fuels are required in the production of many types of biofuels, lessening the GHG benefits. Biomass is much better used for the generation of heat and electricity than biofuels.

Forests as a source of biofuels ●

●

●

157

Greenhouse gases: Indirect effects make it impossible to be certain that GHG reductions would be achieved. Employment: Rural employment will benefit but taxation needed to generate subsidies will cause job losses elsewhere. Economic benefits and costs: Even with the most favorable combination of assumptions the economic costs of biofuels far exceed their benefits.

The World Bank (2008b), in joining the debate, called for a return to a level playing field for biofuels given that the dependence on subsidies distorts market behavior and hides real costs. However, the US Department of Energy (2008b) disagreed that ethanol pollutes more than gasoline and that rainforests will be destroyed for biofuels. Moreover, the US Agricultural Secretary denied that ethanol is having a major impact on food prices and downplayed calls to make changes to biofuel programs (Reuters, 2008). Thus the US looks set to maintain its policy of tariff protection and heavy subsidies for biofuels unless the administration of President Obama has a different view. Europe has maintained its overall policy of increasing the contribution of renewable energy. However, the European Parliament (2008) made some major modifications to targets that acknowledged the social costs and GHG uncertainties of renewables. Ten percent of road transport fuels must come from renewable sources by 2020, but 40 percent of this must come from more sustainable sources, including second generation biofuels, than from traditional biofuels. In 2015 the target is 5 percent of road transport fuel from renewable sources and 1 percent from sources that do not compete with food production. In addition, transport biofuels must save at least 45 percent of greenhouse gases compared with fossil fuels; from 2015 the saving must be 60 percent. Many countries had already had second thoughts on the benefits of their biofuels programs. Australia, Britain, France, Germany, the Netherlands and Switzerland, as well as Quebec, had removed or are revising incentives for farmers, biofuel refiners and distributors (New York Times, 2008). Given the perverse incentives associated with the subsidization of biofuels that are produced mainly by annual crops, our examination now turns to the scale of the contribution that forests could and should make to the generation of transport fuels, presently and in the future.

158

6.5

Carbon sinks and climate change

A ROLE FOR FORESTS IN THE PROVISION OF BIOFUELS?

Wood is already an important source of renewable energy worldwide (Table 6.1); its main contribution is to thermal energy via furnaces. About half the renewable energy of the US is sourced from biomass, and twothirds of this comes indirectly from forests in the form of residues in the pulping and forest products industries but also directly from fuelwood. In Europe about 42 percent of total wood volumes available are used for energy generation. 6.5.1

Use of Forest Residues

When derived from residues, biofuels do not compete with food crops. Their growing does not use large inputs of fossil fuels, and biomass wastes are often used to generate the heat for processing. On the other hand, if the biofuels are made from plantation forests then there is competition with food crops for land and water, and there may well be net GHG emissions if the plantations replace grassland. Wood’s potential for conversion to liquid transportation fuels is the subject of a great amount of research and development. This is being driven in the US by the realization that production from corn-based ethanol is likely to peak at 12 billion gallons (Collins, 2007), leaving a gap of some 22 billion gallons from other sources to meet President Bush’s target of 35 billion gallons by 2017, as illustrated in Figure 6.4 One ton of forest waste can be converted to 75 to 85 gallons of ethanol fuel (Perlack et al., 2005); 231 million tons of this is already being exploited, leaving 137 million tons available mainly from improved fire treatment, logging residues and urban wood residues, which could contribute some 10 billion gallons of ethanol fuel (see Figure 6.6). This would be produced by fermentation or by gasification. For every BTU of gasoline that is replaced by cellulosic alcohol, total life cycle GHG emissions would be reduced by 90.9 percent. Figure 6.7 compares the GHG savings of different fuels according to the US Environmental Protection Agency (2007). The Perlack et al. (2005) calculation of the contribution of forests excludes all protected, wilderness and roadless areas, steep slopes, environmentally sensitive areas and areas where regeneration would be difficult. The calculation excluded the potential contribution of short rotation energy crops using rapidly growing species such as alder, cottonwood, hybrid poplar, sweetgum, sycamore, willow and pine. An increase in biomass from agriculture and conversion of idle land, Conservation

Forests as a source of biofuels

Million dry tonnes per year

Unexploited

Existing use

159

Growth

22

16

16

11

15

8

46 52

49 32

28 11

Fuel Logging treatment residue (timberland)

Source:

35

8 8

Urban Fuel Wood wood treatment residue residue (other forest (forest land) products)

9

Other removal residues

Pulping liquors (forest products)

Fuelwood

Perlack et al. (2005).

Figure 6.6

Potentially available biomass from forests in the US

Reserve Program (CRP) land and some cropland to perennials could amount to almost one billion tonnes of biomass. It is important to note that incentives in the form of tax credits, subsidies and price supports would be necessary to overcome a host of technical, market and cost barriers in achieving such targets. Even then, large-scale bioenergy and biorefinery industries are not expected to exist until around mid-century (Perlack et al., 2005), that is, much later than the target date of 2017 set by President Bush. The European situation with respect to the potential of wood as a biofuel is somewhat different from that in the US, given the relative scarcity of land, the demand for wood by industry, together with the high demand for fuel for energy and heat generation. By the time second generation plants come on line that can process wood in around 2020, the more accessible EU wood will already have been dedicated to local district heating/electricity plants. Only the most remote and expensive sources will be available for processing to liquid fuel. However, second generation plants must be large-scale if they are to become commercial. They will probably be located at ports where they can gather enough material and also access imports which will be cheaper than domestic sources given the competition for feedstock with the domestic heating/electricity generation sector (Joint Research Centre, 2008).

160

Carbon sinks and climate change Coal to liquid w/o carbon C&Sa

118.5

Natural gas to liquid diesel

8.6

Liquid hydrogen Coal to liquid w/ carbon C&S

6.5

a

3.7 –8.5

Methanol Liquefied petroleum gas

–19.9

Corn ethanol (average)b

–21.8 –22.6

Liquefied natural gas

–28.5

Compressed natural gas Gaseous hydrogen

–41.4

Electricity

–46.8

Sugar ethanol Biodiesel Cellulosic ethanolc –150

–56 –67.7 –90.9 –100

–50

0

50

100

150

Percentage change in GHG emissions

Notes: a C&S 5 carbon capture and sequestration. b Natural gas is the primary fuel source. c Average of mix of fermentation and gasification processes and of hybrid poplar, switchgrass and corn stover feedstocks. Source:

US Environmental Protection Agency (2007: 2).

Figure 6.7

6.5.2

Percentage change in GHG emissions by displacing petroleum fuel on an energy equivalent basis

Growing New Forests for Biofuels

Analysis by the author suggests that unharvested plantations are much more effective in saving GHG emissions over a 34-year period than if they are harvested for ethanol production. Using the carbon sequestration model of the Australian Government (2007) the comparison was made between the amount of CO2 removed from the atmosphere by a hectare of hoop pine (Araucaria cunninghamii) grown in north Queensland and the carbon dioxide savings of a plantation that was clear felled, with the resulting biomass being used for ethanol production. Forest thinnings prior to harvest were also used for ethanol production. Ethanol is derived from wood at a rate of 313 to 355 liters of ethanol per tonne of biomass (Perlack et al, 2005; Malmsheimer et al., 2008). Ethanol derived from wood is assumed to emit 90.9 percent less CO2e

Forests as a source of biofuels

161

than the gasoline that it replaces, which produces 2.3kg of CO2e per liter burned. Both types of forest, the unharvested and the harvested, remove CO2e from the atmosphere and sequester it as carbon in biomass. When the forest is thinned and harvested it gives up a portion of its sequestered carbon for conversion to ethanol. Discounting the future savings in CO2 emissions at 2 percent gave a result more than 2 to 1 in favor of leaving the plantation unharvested rather than harvesting it for ethanol. It should be emphasized that this simple analysis ignores the life-cycle emissions involved in the growing and harvesting of the trees, and in the transport of ethanol and gasoline and the production of gasoline. However, it is unlikely that the inclusion of these extra emissions, on both sides of the ledger, would alter the conclusion. A similar result was obtained by Johnson and Heinen (2007) in comparing the GHG implications of growing trees or growing rapeseed for biodiesel. Replacing biodiesel with petroleum diesel and devoting the land to forest was twice as effective, in terms of reducing GHG emissions, as producing biodiesel to replace petroleum diesel. Despite the likelihood that the GHG benefits of carbon sequestration exceed those of bioethanol production, both the US and Europe are bent on policies that will require substantial sources of cellulosic biomass in order to meet their targets for biofuel replacement of petroleum-based fuels. In the US much of this is expected to come from unexploited available sources, better use of residues and perennial and fast-growing trees in short rotation such as hybrid poplar and willow (Geyer and Melichar, 1986; De La Torre Ugarte et al., 2003). Residues require no land-use change and come at a low financial cost, while fast-growing tree plantations deliver cellulose with far less fossil fuel use than annual crops (Wang et al., 2007). If the price is high enough for biomass, land will be switched out of crop, pasture and the CRP to the growing of herbaceous species such as switchgrass and short rotation forests for cellulosic ethanol production (De La Torre Ugarte et al., 2003). At a price around $30 per dry ton, bioenergy crops offer greater profits than existing land uses, and produce 8.51 billion gallons of ethanol, 8.2 million hectares of CRP lands being converted where sensitive lands are excluded. If the price for dry biomass rises to around $40 per dry ton, 16.7 billion gallons of ethanol would be forthcoming from land switched to cellulosic production, almost a third (12.9 million acres) being CRP land. Conventional crop prices rise under both scenarios. In contrast to the US, the contribution of forests in the EU is constrained and cellulosic biomass requirements are more likely to be imported, as concluded above.

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Carbon sinks and climate change

It should be emphasized that while marginal or degraded land in both the US and EU have been considered to be available for cellulosic biomass production, it is likely that yields will be low from such lands and production may well be uneconomic. Moreover, marginal lands may harbor considerable biodiversity and this should be considered when contemplating the benefits and costs of their conversion to short-rotation forest monocultures.

6.6

GLOBAL SCENARIOS IN BIOFUELS PRODUCTION

The OECD has forecast rising prices for agricultural commodity prices, particularly vegetable oils (OECD, 2008). While the world financial crisis of 2008 will slow demand for commodities in the near future, world economic growth will in time regain its former momentum. Given constraints on domestic supply, a likely scenario is that much of the developed world’s needs for vegetable oils for biodiesel and human consumption and for ethanol to replace petroleum fossil fuels will be outsourced. Production is likely to come from existing low-cost countries in south-east Asia and Brazil. The OECD (2008) expects palm oil production to increase by 40 percent by 2017, for example, and Brazilian sugarcane production to increase by 75 percent over the same period. This growth will entail the clearing of tropical forests and savannah lands unless drastic measures are taken to modify the economic drivers. Three measures to avert accelerating deforestation present themselves: First is the regulation of land-use change. This has high political risks for governments in the countries concerned, and is unlikely. Second is the payment of landholders for conserving carbon and preventing its release into the atmosphere. If the price of carbon is high enough, that is higher than present prices, then retaining the forests and savannahs becomes a viable option compared with conversion to croplands. Such an incentive scheme will be on the table for negotiation at the climate change conference in Copenhagen in late 2009. (The complexities of implementing such a scheme have been addressed in Chapters 1 and 2, and policy issues surrounding it are addressed in Chapter 8.) Third is the removal of distorting subsidies by the US and the EU for biofuels and instead focusing on other measures to reduce dependency on liquid fuels, such as fuel efficiency. The mounting criticisms of subsidy policies have paralleled the growing body of evidence of their negative environmental and GHG consequences. However, the twin problems for governments are the limit to fuel efficiency gains in

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163

transport and the lack of alternative sources for liquid transport fuels, other than biomass. A reduction in US and EU tariffs on biofuels, as advocated by the International Monetary Fund (2007), would need to be accompanied by a reduction in subsidies; otherwise an increase in land-use change would occur, particularly in Brazil and south-east Asia. It is likely that domestic policy settings will prove to be flexible, given the dynamic nature of world commodity markets and the need to accommodate international agreements to control global greenhouse gas emissions. Preferable to subsidizing biofuels or for that matter any alternative energy source is the adoption of a domestic policy that would put a price on all greenhouse gases. Such a policy is a comprehensive cap and trade scheme. Greenhouse gases involved in the production, processing and transport of fuels would be priced. The genuinely low emission alternative fuels and other energy sources emerge as the market performs its function.

REFERENCES Australian Government (2007), The national carbon accounting toolbox and data viewer, Canberra, Australia: Department of Environment and Heritage and Australian Greenhouse Office. Bush, G. (2007), ‘State of the Union Address’, available at http://www.whitehouse. gov/stateoftheunion/2007/index.html. BP (British Petroleum) (2008), ‘Historical data’, available at http://www.bp.com/ sectiongenericarticle.do?categoryId59023773&contentId57044469. Collins, K. (2007), ‘The new world of biofuels: implications for agriculture and energy’, presentation to EIA Energy Outlook, Modeling and Data Conference, 28 March, available at www.eia.doe.gov/oiaf/aeo/conf/collins/collins.ppt. Commission of the European Communities (2007), ‘Renewable energy road map: Renewable energies in the 21st Century: building a more sustainable future’, Communication from the Commission to the Council and the European Parliament, Brussels. Coyle, W. (2007), ‘The future of biofuels: a global perspective’, Amber Waves, 5(5), 24–9. De La Torre Ugarte, D., M. Walsh, H. Shapouri and S. Slinsky (2003), ‘The economic impacts of bioenergy crop production on US agriculture’, Agricultural economics report number 816, Washington, DC: USDA. Dorr, T. (2008), ‘Biofuels and food’, Cereal Foods World, 53(2), 76–7. Edwards, R. (2008), ‘EU biofuels: costs, supply and greenhouse gas savings’, Powerpoint presentation to 2nd European symposium on technological developments in renewable energies, 26–7 June, Hamburg, Petten, the Netherlands: Joint Research Centre, European Commission. Energy Information Administration (2007), ‘Renewable energy consumption and electricity’, Preliminary 2006 statistics, available at http://www.eia.doe.gov/ cneaf/solar.renewables/page/prelim_trends/rea_prereport.html.

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European Parliament (2008), ‘More sustainable energy in road transport targets’, available at http://www.europarl.europa.eu/news/expert/infopress_ page/064-36659-254-09-37-911-20080909IPR36658-10-09-2008-2008-false/ default_en.htm. Fargione, J., J. Hill, D. Tilman, S. Polasky and P. Hawthorne (2008), ‘Land clearing and the biofuel carbon debt’, Science, 319, 1235–38. F.O. Licht Consulting Company (2007), ‘Key world energy statistics’, cited by International Energy Agency, IEA, Paris. Garcia-Perez, M., T. Adams, W. Goodrum, W. Geller and K. Das (2007), ‘Production and fuel properties of pine chip bio-oil/biodiesel blends’, Energy and Fuels, 21(4), 2363–72. Geyer, W. and M. Melichar (1986), ‘Short-rotation forestry research in the United States’, Biomass, 9, 125–33. IMF (International Monetary Fund) (2007), ‘Biofuel demand pushes up food prices’, available at http://www.imf.org/external/pubs/ft/survey/so/2007/ RES1017A.htm. IMF (International Monetary Fund) (2008), ‘Primary commodity prices’, available at http://www.imf.org/external/np/res/commod/index.asp. International Energy Agency (2004), Biofuels for Transport, an International Perspective, Paris, France: IEA. Johnson, E. and R. Heinen (2007), ‘The race is on; biodiesel is big and getting bigger, but is it any better than its petroleum-derived equivalent in terms of global warming?’, Chemistry and Industry, 8, 22–3. Joint Research Centre (2008), ‘Biofuels in the European context: facts and uncertainties’, Joint Research Centre of the European Commission, Petten, Netherlands. Laurance, W. (2007), ‘Switch to corn promotes Amazon deforestation’, Science, 318, Letters: 1721. Malmsheimer, R., P. Heffernan, S. Brink, D. Crandall, F. Deneke, C. Galik, E. Gee, J. Helms, N. McClure, M. Mortimer, S. Ruddell, M. Smith and J. Stewart (2008), ‘Preventing GHG emissions through biomass substitution: forest management solutions for mitigating climate change in the United States’, Journal of Forestry, 106(3), 136–40. Mitchell, D. (2008), ‘A note on rising food prices’, Policy Research Working Paper 4682, Washington, DC: The World Bank. Morton, D., R. DeFies, Y. Shimabukuro, L. Anderson, E. Arai, F. Espirito-Santo, R. Freitas and J. Morisette (2006), ‘Cropland expansion changes deforestation dynamics in the southern Brazilian Amazon’, Proceedings of the National Academy of Sciences, 103(39), 14637–41. New York Times (2008), ‘Europe, cutting biofuels subsidies, redirects aid to stress greenest options’, 22 January. OECD (Organization for Economic Cooperation and Development) (2008), ‘Rising agricultural prices: causes, consequences and responses’, OECD Observer, August 2008. Perlack R., L. Wright, A. Turhollow, R. Graham, B. Stokes and D. Erbach (2005), ‘Biomass as feedstock for a bioenergy and bioproducts industry: the technical feasibility of a billion-ton annual supply’, Tennessee: Oak Ridge National Laboratory. Reuters (2008), ‘USDA head downplays calls to cut biofuel mandate’, available at http://www.reuters.com/articlePrint?artiocleId5USN1950660520080519.

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The Scientist Community (2008), ‘Tree’s wood fiber converted into fuel for your car?’, available at http://the-scientist.com/community/posts/list/89.page. Searchinger, T., R. Heimitch, R. Houghton, F. Dong, A. Elobeid, J. Fabiosa, S. Tokgoz, D. Hayes and T. Yu (2008), ‘Use of US croplands for biofuels increases greenhouse gases through emissions from land-use change’, Science, 319, 1238–40. US Department of Agriculture National Agricultural Statistical Service (2008), ‘Soyabeans’, available at http://www.nass.usda.gov/QuickStats/index2.jsp. US Department of Energy (2008a), ‘Biomass and biofuels update to Congress’, available at http://apps1.eere.energy.gov/views/pdfs/may_2008_hill_briefing. pdf. US Department of Energy (2008b), ‘Biofuels and greenhouse emissions: myths versus facts’, available at http://www.energy.gov/media/BiofulesMythFact.pdf. US Environmental Protection Agency (2007), ‘Greenhouse gas impacts of expanded renewable and alternative fuel use’, Office of Transportation and Air Quality, available at http://www.epa.gov/OMS/renewablefuels/420f07035.htm. von Braun, J. (2008), ‘Responding to the world food crisis: getting on the right track’, Washington, DC: IFPRI. Wang, M., M. Wu and H. Huo (2007), ‘Life-cycle energy and greenhouse gas emissions: impacts of different corn ethanol plant types’, Environmental Research Letters, 2, April–June, 17 pp. World Bank (2008a), ‘Biofuels: the promise and the risks’, available at http://econ. worldbank.org/WEBSITE/. World Bank (2008b), ‘Biofuels: big potential for some . . . but big risks too’, available at http://www1.worldbank.org/devoutreach/textonly.asp?id5506. Zoellick, R. (2008), ‘Food price crisis imperils 100 million people in poor countries’, available at http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,, contentMDK:21729143~pagePK:64257043~piPK:437376~theSitePK:4607,00. html.

7.

Forestry in the climate change policies of selected developed countries

This chapter reviews the national policies that have been adopted by developed countries for the mitigation of greenhouse gases (GHGs) and the role of forestry within those policies. Climate change policy is dynamic, and discussions are well underway on the international framework that will replace the Kyoto Protocol, post-2012. While land-use change and forestry (LUCF) are mechanisms for flexibility that are likely to be built into a new protocol, their effectiveness is also dependent on the policies adopted by those countries agreeing to GHG emission cuts. Cap and trade schemes, rather than tax policies, have emerged as the preferred vehicle for curbing emissions in the US, Europe, Australia and New Zealand. The restriction on allowances to emit GHGs under cap and trade schemes puts a price on the allowances.22 The deeper the cuts required by the caps, the higher the prices of allowances and the greater the demand for offsets from forestry projects that sequester carbon. Very few countries have announced medium-term targets for emissions or detailed schemes for achieving them. This chapter examines climate change policies in selected developed countries and regions where caps on emissions have been adopted or policies are at a sufficient stage of development to enable the potential role of forestry to be reviewed; these are the Kyoto Protocol’s Annex I countries, the US, Australia, New Zealand and the EU. The chapter then examines policies that are in place that cover the execution of forestry projects by developed countries in developing countries. Finally the chapter develops some policy guideposts for forestry in the new international regime that will replace the Kyoto Protocol. The discussion and recommendations are informed by the analysis in previous chapters on the role of forestry in mitigating climate change. Annex B countries that have ratified the Kyoto Protocol (at the time of writing, all major industrialized countries except the US) have agreed to reduce their emissions by an average of 5.2 percent by 2012, compared with 1990 levels.23 The ability of Annex B countries to trade their allowances, or assigned amount units (AAUs) (each equal to one tonne of 166

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167

carbon dioxide equivalent, CO2e), allows them to lower national costs of compliance with their caps, as explained in Chapter 1. Similarly, where domestic policy allows, the forest sector can generate allowances for sale, while industries subject to caps can offset their emissions by buying into forestry projects at a lower cost than by abating their own emissions. The Kyoto Protocol already allows developed countries to offset their emissions in other developed countries and in developing countries. Forestry is one option amongst an array of possible offsets that include fuel switching and the adoption of renewable energy technologies. The US was until recently, when it was overtaken by China, the country with the greatest greenhouse gas emissions, so its policies will be crucial in meeting global targets for GHG emissions. Twenty-eight US states and Canadian provinces have already developed cap and trade policies but, while President Obama is intent on cutting US greenhouse gas emissions, a cap and trade bill needs to pass Congress. The European Union is a large economic bloc containing 27 countries which already operates within the world’s first scheme and presently by far the largest: the EU emission trading scheme (EU ETS). Australia has the distinction of being the highest emitter of greenhouse gases per person. It also has vast forests and lands capable of supporting plantations. Its imminent introduction of a carbon pollution reduction scheme provides insights into the role of forestry and the mechanics of its incorporation into domestic climate change policy. New Zealand has also framed a cap and trade scheme that includes forestry.

7.1

CLIMATE POLICY AND FORESTRY IN THE UNITED STATES

The US Congress refused to ratify the Kyoto Protocol, thus there is no national scheme to cut US emissions at the time of writing. This vacuum in climate change policy led to the development of several regional schemes to cut greenhouse gases, in particular the cap and trade schemes of the Western Climate Initiative of 11 US and Canadian Provinces and the Regional Greenhouse Gas Initiative (RGGI) of 10 eastern US states.24 This section focuses on the nature of nascent national climate policy in the US, and the potential role of forestry. 7.1.1

Characteristics of a Federal Cap and Trade Scheme

Reduction in future emissions in the US is made difficult by the fact that the country is likely to continue to be characterized by strong population

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growth and economic growth (subsequent to the economic downturn in 2008/2009), together with a reliance on carbon-based power generation. A range of sources suggests a rise in US emissions from 7 Gt of CO2e in 2005 to 10 Gt in 2020, that is an increase of some 30 percent. The US is a country with a very large land mass, much of which is capable of growing forests; Sathaye and Chan (2008) estimate that up to 66 million hectares could be suitable for tree planting. The national potential of forests for climate change mitigation under a cap and trade scheme can be explored by examining the results of an analysis by the US Environmental Protection Agency (USEPA, 2008) of the prominent Lieberman-Warner Climate Security Act of 2008 S. 2191 (hereafter referred to as S. 2191). The significance of this bill is that it caps emissions from industry and is detailed enough in its specification to enable the forecasting of its impacts on US emissions and the contributions of different sectors of the economy, including forestry. S. 2191 achieves coverage of 87 percent of US CO2e emissions, issuing allowances and allowing the trading of such allowances to industries such as oil refining, facilities that use more than 5000 tons of coal per year and industrial gas producers. Importantly, S. 2191 allows the purchase of domestic and international offsets, including from forestry, to each meet 15 percent of compliance obligations. Compared with a businessas-usual scenario, S. 2191 is projected to reduce total US CO2e emissions by some 50 to 60 percent by 2050 compared with 2010 levels. The ability of capped industry to purchase forestry offsets is crucial to reducing costs of compliance. The relaxation of the restraint of 15 percent on the use of international offsets reduces the cost at the margin by 26 percent, while the removal of the 15 percent use of domestic offsets increases costs at the margin by 34 percent. The relaxation of the offsets both domestically and internationally reduces costs by 71 percent (see Figure 7.1). The USEPA (2008: 9) analysis estimates that no less than 46 percent of the abatement is achieved in year 2015 by the use of domestic and international offsets in S. 2191. This level reduces over time as the overall constraint of 15 percent of total use of offsets starts to bite. Land-use change, that is forestry combined with agriculture, makes by far the largest contribution of domestic offsets, making large annual reductions of around 400 Mt CO2e after the price of allowances reach $50 per tonne of CO2e, which is expected in years 2020 to 2025. Modeling by USEPA (2005) of an unconstrained (that is without constraints on the use of offsets as in S. 2191) supply function for US forestry and agriculture showed that the opportunity cost of converting land to forestry is relatively high, and at lower prices for CO2e the cheaper options for carbon sequestration of forest management and soil management

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120 Change in marginal cost of abatement, %

100 80 60 40 20 0 –20 –40 –60 –80 Unlimited domestic Unlimited domestic 15% domestic and international offsets, 15% offsets, 15% offsets international international offsets offsets (reference case) % change

–71

–26

0

15% domestic offsets, no international offsets

No domestic or international offsets

34

93

Note: The bill specifies 15% use of domestic, plus 15% use of international offsets. The figure shows the increase or decrease in the marginal costs of abatement with the increase or decrease in the level of offsets allowed. Source:

USEPA (2008: 11).

Figure 7.1

Change in the marginal cost of abatement with change in domestic and international offsets in the Lieberman-Warner Bill S. 2191

dominate. The modeling confirms that forest management is a low-cost activity, but as prices rise, afforestation and then biofuels become dominant (see Table 7.1). A study by McKinsey (2007) also found that forest sinks on private lands would increase with the price of CO2e. As noted in Chapter 1 great caution is needed in interpreting the magnitude of the forestry’s potential suggested by such top-down models. Bottom-up studies that take into consideration local barriers to implementation, estimate levels of CO2e removals for North America at less than a third of the top-down estimates (Nabuurs et al., 2007: Figure 9.13). Table 7.1 also indicates biodiversity implications and reversibility problems of activities involving forestry. If only afforestation25 is included and forest management is excluded, the latter suffers, leading to carbon losses. To reduce this leakage both afforestation and forest management need to be included in a scheme. The USEPA (2005) emphasizes that forestry programs must also include liability provisions to minimize reversal. Other potentially important issues in mitigation by agriculture and forestry noted are the difficulties of measuring monitoring and verifying projectlevel effects and setting project baselines (USEPA, 2005). Whether President Obama’s intent to reduce emissions (Obama, 2008),

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Table 7.1

Characteristics of CO2e removal activities

Activity

Price of CO2e necessary to induce activitya

Environmental Co-effects

Reversal risk

Afforestation

Medium to high

High

Forest management

Low to medium

Biofuels

Medium to high

Biodiversity either 1 or – depending on character of new forest and ecosystem replaced by new forest. Water quality improvement. Longer rotations can provide critical habitat. Biodiversity impacts depend on previous land use.

Note: Source:

a

High

Low

Low prices are <$5 per tonne of CO2e, high pices are >$30 per tonne of CO2e. USEPA (2005: Tables 8-1, 8-2).

or cap and trade legislation that passes Congress, will impact food prices depends on the provisions governing the use of forestry offsets by capped industries. While US involvement in global GHG cuts is essential, the results of the USEPA (2008) study demonstrate that its contribution to reduction on a global scale can only be modest, confirming that a global approach is essential to achieve emission reductions that will avoid catastrophic climate change. Without action by the international community, S. 2191 would lower CO2 concentrations in the atmosphere by 2095 by 23 ppm, to 696 ppm; concerted international action assumed in the modeling lowers concentrations to 488 ppm (USEPA, 2008:19). 7.1.2

Indirect Effects of a US Cap and Trade Scheme

McCarl et al. (2002) forecast that biofuel and cap and trade policies divert land away from food crops to forestry and biofuel feedstocks. US agricultural producers will gain but US consumers lose as agricultural commodity prices increase, particularly as CO2e prices rise above $50 per tonne. The catch-22 is that increasing access to forestry and agricultural offsets allows cuts to be made in emissions at a lower cost, but with higher food prices.

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As with all such heavy policy interventions, the global indirect effects of cap and trade schemes need to be carefully examined. It was seen in Chapter 6 that the increase in US and EU subsidies for biofuels had negative social and climate change consequences. The poor were affected by rising food prices and, moreover, GHG emissions increased rather than decreased because biofuels policy led to an accelerated rate of conversion of tropical forests to agriculture. To fully appreciate the impacts of US policy it is necessary to undertake modeling of a change in land use in other countries in response to higher global prices resulting from diversion of land to forestry and biomass in the US. Given that other countries that export food grains such as Australia will also undergo land-use change as a result of the adoption of climate change policy, it is imperative that global models should be constructed that examine the indirect effects of concerted actions. If food production is threatened by land-use change then the ultimate objective of the UNFCCC (1992; Article 2) to: ‘[A]chieve stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system . . . achieved within a time-frame sufficient to . . . ensure that food production is not threatened . . .’, is compromised. 7.1.3

The future of US initiatives

The successful passage of an emissions cap and trade bill through Congress will be no easy task and will involve the intersection of many disciplines and interest groups and much political haggling. The pace of development and implementation of legislation will probably be affected by the diversion of the attention of representatives and the administration on the immediate task of avoiding a deepening of the financial crisis. An unavoidable development associated with the eventual implementation of a federal scheme is the pre-emption of state and regional carbon markets to avoid overlaps of regulation and markets. Should there be an opportunity for pre-existing emission reduction projects including forestry in both voluntary and state markets to convert to the federal system, a precondition would be that they meet federal standards (Berendt, 2008).

7.2

CLIMATE POLICY AND FORESTRY IN THE EU

The EU has flagged a target of lowering its greenhouse gas emissions by at least 50 percent, compared with 1990 levels, by 2050 (EU, 2008). Abandoned crop and pasturelands and sparse woodlands available for

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afforestation in the EU amount to some 50 million hectares, or 75 percent of that available in the US. Afforestation rates have been much lower in the EU than in the US, at just over 200 000 hectares a year compared with almost a million hectares a year. With a price of up to $20 per tonne of CO2e removed from the atmosphere, afforestation rates would increase and the EU would become a source of carbon sequestration by the end of the century, but still small compared with the US (Nabuurs et al., 2007; Sathaye et al., 2007). This is explained by the very high cost of carbon sequestration in Europe compared with the US; a study by van Kooten and Sohngen (2007) found that Europe was the world’s highest cost region. Meanwhile, even the relatively modest potential of EU forests to contribute to the stabilization of atmospheric greenhouse gas concentrations is not being harnessed. The EU ETS does not enable capped industries to use forestry offsets generated by plantation forestry in EU countries. A Commission of the European Communities (2008) memorandum reiterated the reasons for maintaining its ban on crediting forestry sinks. The ban extends to the generation of credits by avoiding deforestation in tropical countries as well as to afforestation within the EU. The EU’s reasons for the ban on forestry are as follows: ● ● ● ● ●

The temporary and reversible nature of carbon storage poses risks for companies and Member States. Monitoring and reporting methods do not match the standard currently adopted by installations in the EU ETS. Monitoring and reporting is expensive, reducing the attractiveness of forestry projects. The transparency, simplicity and predictability of the EU ETS would be compromised. The sheer quantity of credits could undermine the market and would require limitation, rendering benefits marginal (EUROPA, 2008a: Clause 23).

The EU has undertaken a review of its policy on deforestation and forest degradation in developing countries. The review was in response to the agreement by the UNFCCC conference of the Parties (COP) in Bali, in December 2007, to address these issues though a long-term action plan. While the EU supports action to limit deforestation, it proposes to exclude emission credits generated by avoided deforestation from entering global markets; the reasons stated being the same as those listed above (Commission of the European Communities, 2008). Nevertheless, at the 2008 Poznań climate change conference, the EU, supported by a number

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of developing and developed countries, proposed the creation of an international financial mechanism for rewarding the reduction of deforestation and forest degradation (REDD) that would lie outside but complement global markets (EUROPA, 2008b). Policy proposals for REDD are examined in some detail in Chapter 8.

7.3 7.3.1

CLIMATE POLICY AND FORESTRY IN AUSTRALIA AND NEW ZEALAND Australia

If passed by the Senate, cap and trade will be in place in Australia in 2011. Australia’s target is to reduce emissions by 60 percent below 2000 levels by 2050, and its interim target is a reduction of between 5 and 25 percent below 2000 levels by 2020. The willingness of the rest of the world to adopt targets, following the Copenhagen climate change conference in December 2009, will influence Australia’s targets post-2013 (Australian Government, 2009). A considerable amount of independent research has been done to inform the Australian people and the Australian government of the need to reduce and to target global and Australian carbon emissions. Garnaut (2008) emphasizes the imperatives of climate change policy, the methods that can be used to achieve greenhouse gas reduction targets and the consequences of proposals for households and industry. The Australian government also conducted modeling of forestry’s role in the cap and trade scheme (Lawson et al., 2008) prior to issuing a white paper that signals its preferred policy options (Australian Government, 2008). The importance of including forestry in Australia’s cap and trade scheme is emphasized by the results of modeling with and without forestry. Excluding forestry consistently drives the carbon price 30 percent higher for the same level of mitigation. GNP is half a percentage lower in 2100 when forestry is excluded (Lawson et al., 2008). The role of forestry is very sensitive to the price per tonne of CO2e and the deeper the cuts in emissions, the higher the price. In dealing with the crediting of removals of CO2e by reforestation in its scheme, the Australian government is innovative. It tackles the permanence issue by making a small deduction for a buffer each time credits are issued. In the case where forests are continually harvested and replanted, credits are issued in the initial growing phase with a limit determined by the average removals (less an allowance for the buffer). This system avoids the necessity to debit and credit annually. Where the harvested forest is

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Removals and permits

70 60 50 Permits issued Buffered permit limit Cumulative removals

40 30 20 10

5 Y2 02 0 Y2 02 5 Y2 03 0 Y2 03 5 Y2 04 0 Y2 04 5 Y2 05 0 Y2 05 5 Y2 06 0 Y2 06 5 Y2 07 0 Y2 07 5 Y2 08 0

01 Y2

Y2

01

0

0

Note: Annual permits are issued ex-post during the growing phase, removals being verified every five years. The limit to permits issued is less than the total of net CO2e removals, creating a buffer against losses. Source:

Author’s own design.

Figure 7.2a

Stylized representation of the generation of permits for CO2e removals by unharvested reforestation under Australia’s Carbon Pollution Reduction Scheme

not replanted, permits need to be surrendered. Figures 7.2a. 7.2b and 7.2c illustrate how the scheme credits reforestation in unharvested and harvested reforestation.26 The crediting for reforestation projects is based on output from the National Carbon Accounting Toolbox (CAMFor) that provides a high degree of certainty in estimating the profile of CO2e removals in any reforestation situation; a fuller description of Australia’s NCAS is in Chapter 5. While Australia’s Carbon Pollution Reduction Scheme (CPRS) will allow the import of unlimited certified emission reductions (CERs) from its commencement in July 2011, forestry CERs under the CDM will not be able to be used.27 The avoidance of contingent liabilities is the main reason given for this exclusion (Australian Government, 2008). The contingent liability is created by the need to replace both temporary CERs (tCERs) and long-term CERs (lCERs) at the end of their lives, which is two commitment periods for tCERs and between 20 and 60 years for lCERs. Australia’s scheme does not include deforestation even though landuse change contributes about 7 percent to Australia’s total emissions and will emit 44M tonnes of CO2e per year during 2008–12 (Australian Government, 2008: 6-3). The reasons given for this exclusion are that deforestation is much lower than in 1990, there are now restrictions in

Forestry in climate change policies of developed countries Permits issued

Buffered permit limit

175

Cumulative removals

Removals and permits

60 50 40 30 20 10

5 Y2 02 0 Y2 02 5 Y2 03 0 Y2 03 5 Y2 04 0 Y2 04 5 Y2 05 0 Y2 05 5 Y2 06 0 Y2 06 5 Y2 07 0 Y2 07 5 Y2 08 0

01 Y2

Y2

01

0

0

Note: The total of permits generated during the growing phase is based on the average cumulative net CO2e removals, calculated over the long term, less a buffer allowance. Author’s own design.

Stylized representation of the generation of permits by CO2e removals by a harvested reforestation under Australia’s Carbon Pollution Reduction Scheme

60 50 40 30 20 10 0 –10 –20 –30

Source:

06 5 Y2 07 0 Y2 07 5 Y2 08 0

06 0

Y2

0

05 5

Y2

5

05 Y2

0

04 Y2

5

04 Y2

0

03 Y2

5

03

02

Y2

0 02

Y2

01

Y2

Y2

01 Y2 Note:

5

Permits issued Buffered permit limit Cumulative removals

0

Removals and permits

Figure 7.2b

Y2

Source:

Permits are surrendered if the forest is not re-established. Author’s own design.

Figure 7.2c

Stylized representation of the generation of permits for CO2e removals by a harvested reforestation that is not replanted, under Australia’s Carbon Pollution Reduction Scheme

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Carbon sinks and climate change

place on clearing land, and what forest is cleared tends to be in very small pockets or classified as regrowth. Administrative costs of including deforestation would thus be high. Moreover, if deforestation coverage were in prospect, preemptive clearing would be given a powerful incentive (Australian Government, 2008). It is likely that interest in the Australian voluntary market will fall off now the CPRS has been announced. The forestry sector will instead be able to create government certified permits under the emission trading scheme. 7.3.2

New Zealand

The inherent instability in climate change policy is demonstrated by the suspension of New Zealand’s already enacted cap and trade scheme by a newly-elected government. The enacted scheme required participants to hold one NZU (equal to an AAU) or a Kyoto unit (see note 2) to cover each metric tonne of CO2e emitted within the compliance period. Integration with global carbon markets means that emission prices in New Zealand would align with international prices, ensuring that the level of price exposure in the New Zealand economy is not too far ahead of, or too far behind, prices determined by international efforts to reduce greenhouse gas emissions. Support for the CDM gives New Zealand businesses access to least-cost ways to reduce emissions. Forestry had been included in the scheme from 2008, covering both deforestation and afforestation (Ministry for the Environment, 2008). The new government intends to revise the scheme or switch away from a cap and trade to a carbon tax regime, announcing its decision in late-2009 (Point Carbon News, 2008).

7.4

POST-KYOTO POLICIES AND RULES FOR FORESTRY IN DEVELOPED COUNTRIES

This brief review of domestic climate change policies has served to highlight the potential of forestry but also to raise questions concerning the extent of forestry’s role. Should there be free rein on forestry credits, and if so what will be the indirect effects of induced land-use change? This question must be addressed by further research. The current rules for land use, land-use change and forestry under the Kyoto Protocol relate almost specifically to developed countries. The LULUCF rules were adopted as a means by which Annex I countries could meet their targets at least cost. From the analysis above of selected developed countries it is evident that climate change policies are still in their development stage, and while

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177

there are stated potential roles for forestry, with the exception of the EU, the strength of the price signals that will encourage forestry sinks is as yet unpredictable. Even if the schemes in the offing stimulate the initiation of forestry projects in the next two years, their impact will be negligible by 2012 when the first commitment period expires. It takes time for projects to be funded and initiated and for trees to become established and sequester carbon in any quantity. Indeed in the years immediately after establishment it is not uncommon for projects to be net emitters of greenhouse gases (see Table 5.1 and Figure 5.4). Notwithstanding the lack of experience with the implementation of the land use and forestry provisions of the Kyoto Protocol as they apply to developed countries, some observations and recommendations can still be made concerning a future framework. Given the massive international investment already made in the development of a quantitative accounting approach for land-use change and forestry (Höhne et al., 2007), the transition to a post-Kyoto system should be as seamless as possible. Radical departures from the current system would require parallel administrations of the old and new (Schlamadinger, 2007b). Any significant deviation from current systems would also undermine the continuity of national systems that are in the implementation phase as outlined above. Nevertheless, there are some changes that would improve accounting for carbon and facilitate the mobilization of investment in forestry activities in developed countries. These emerge from the analysis of the Kyoto Protocol in Chapter 3 and broadly follow the recommendations of Schlamadinger et al. (2007a; 2007b). These recommendations are for: ●

● ● ●

making accounting for revegetation the same as for afforestation and deforestation, that is that the contribution is within a year rather than against a base year; the removal of caps on credits and debits in managed forests; the inclusion of stored carbon in harvested wood products, if satisfactory means of accounting can be devised. allowing crediting in future commitment periods.

The growth in greenhouse gas emissions from non-Annex I countries which are not subject to caps is rapid with the likelihood that their total emissions will exceed those of Annex I countries in the not-too-distant future (see Figure 7.3). If global emissions are to be brought under control the proportion of emissions generated by developing countries will need to be substantial, requiring a number of developing countries to come under caps and LULUCF provisions.

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Carbon sinks and climate change

Million tonnes of CO2e emitted

25000 20000 15000 10000 5000

Non-Annex I countries increasing at 5.5% per annum Annex I countries increasing at 0.2% per annum

0 2002

2004

2006

2008

2010

2012

2014

Year Note: Source:

The annual increases are based on the growth in emissions from 1990 to 2004. World Resources Institute (2008).

Figure 7.3

7.5

Projected greenhouse gas emissions for Annex I and nonAnnex I countries, 2004 to 2013

POLICIES FOR AFFORESTATION AND DEFORESTATION BY DEVELOPED COUNTRIES IN DEVELOPING COUNTRIES: THE CDM

The policy analysis now extends to the Clean Development Mechanism (CDM) of the Kyoto Protocol which allows Annex B countries to mount forestry projects in developing countries and to claim the reductions in greenhouse emissions achieved against their national carbon accounts. Developing countries are expected to benefit from the investment and the sustainable development aspects of such projects. This section analyzes and discusses the effectiveness of the CDM in terms of providing viable carbon sinks and what role it might have in the future. The conclusions rest on detailed analysis conducted in Chapter 2. Forestry under the CDM is bound by strict rules designed to overcome the temporary nature of forests and the risk that forestry offset credits would overwhelm markets and reduce the incentive to reduce emissions. In the first commitment period the role of forestry has been limited to afforestation and deforestation (A/R), reduced deforestation being excluded. Moreover, the role that A/R can play is constrained: the Marrakesh Accords of COP 7 placed limitations on the amount of credits claimable

Forestry in climate change policies of developed countries

Table 7.2

Certified Emission Reductions (CERs) under the Clean Development Mechanism (CDM) to 2012, by type of offset, millions, as at November 2008

Offset

Certified Emissions Reductions, Millions

Renewables CH4 reduction & cement & coal mine/bed Energy efficiency Fuel switch HFC & N2O reduction Afforestation & reforestation Accumulated total Source:

179

971.6 544.2 349.8 204.3 757.1 11.0 2,838.1

UNEP Risoe (2008).

to Annex B Parties under the CDM to 1 percent times 5 of their 1990 emissions (or 5 percent of their 1990 emissions for the period 2008–12) (UNFCCC, 2006: 7). And under the CDM, A/R projects are restricted to those that would not have occurred without CDM financing and to areas that were not forested prior to 1990. The Certified Emissions Reductions (CERs) achieved under the CDM are deemed to be temporary. CERs cannot be carried over to the next commitment period but must be replaced at the end of five years. Longterm CERs must be replaced at the end of 20 to 60 years by non-forestry CERs, or when the certification report indicates a reversal of net removals of CO2e. The contribution of forestry under the CDM to the creation of carbon sinks can be assessed by examining the CDM project pipeline. Only 34 A/R projects have reached the stage where they are being assessed and are in the CDM pipeline at the time of writing, a number which represents less than 1 percent of the total number of projects of different kinds that are coming forward. Moreover no CERs (each equivalent to one tonne of CO2e) had yet been issued to A/R projects, although the total CERs issued to all projects was over 2 billion (UNEP Risoe, 2008). Table 7.2 shows that the A/R projects make up only 0.4 percent of the 2.8 billion CERs expected to be generated before the end of the first commitment period in 2012. An important explanatory factor is the late start of forestry projects under the CDM. While other CDM projects could accumulate credits from year 2000, the basic rules governing forestry were not resolved until

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Carbon sinks and climate change

the end of 2003, which makes the implementation of projects before the end of 2005 unlikely, given the long lead times for project development and registration. By the end of the first reporting period in 2012, that is six years after planting in the beginning of 2006, only a fraction of the potential removal of CO2e by A/R can be achieved, as shown in Figure 2.3. Neeff et al. (2007: 3) reported that there were some 50 to 70 late-starting projects under development. However, it remains to be seen how many are capable of reaching the point where they are issued with CERs by 2012, given that the monitoring process in A/R projects is highly complex and may delay or prevent the issue of CERs, and that there is limited time to correct any project design deficiencies. Further, Neeff at al. (2007) suggested that the profitability of projects was dependent on CER prices well in excess of the current market price of $3.00. Even if all these projects are successful the contribution of forestry in the CDM, compared with other offsets, would still be relatively minor. There are several factors that contribute to the minor contribution of forestry. The sheer complexity of the pipeline was illustrated in Chapter 2, where Figure 2.4 shows that there are 13 major steps in achieving the issuance of CERs. Complying with the technical criteria necessitates expensive advice from international consultants, a major cost component in administration costs of $100 000 to $250 000, which is in addition to the costs of physically mounting a project. The project development costs and some of the administrative costs need to be met up to two years before there is a prospect of sale of CERs. Only a fraction of these high establishment and administrative costs could be covered by the sale of CERs generated before 2010 by A/R projects established at the beginning of 2006. Moreover, as Chapter 2 points out, a deterrent to the establishment of forestry projects in the beginning of 2006 and since is that credits are not bankable. There is no guarantee that credits generated post-2012, which by the nature of the growth of forests is the bulk of credits, will be saleable. Thus their very intrinsic value and tradability is brought into question. Adding to the risk of investment in A/R is the discount that applies to the value of forestry CERs, because they are temporary and must be replaced. Their value to investors appears to be principally as a bridge to be followed by investment in permanent offsets. Chapter 2 points out that if the increase in replacement cost over time is in excess of the discount rate, then the future replacement price of expiring credits is greater than their repurchase costs and a loss will be made on the investment. The long delays in the fulfillment of forestry projects exacerbate the market price risk.

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It is not surprising, given these impediments, that CDM forestry has been all but ignored by project developers and that most projects have been funded by the World Bank, rather than the private sector. A post-Kyoto protocol could remove some of the impediments such as bankability, and speed up the approval process. The ability to earn credits in a future commitment period would make A/R more attractive to investors. However, it is doubtful if the general rules that apply to A/R can be relaxed without compromising the veracity of the CERs it generates. It was noted in Chapter 3 that even the voluntary forestry offset market, where there has been an absence of complexity, was moving towards the adoption of similar rules to the CDM in its validation of forestry projects. Projects that have complied with CDM rules are automatically accepted under the Voluntary Carbon Standard. Little has been said about the role of forestry under the other flexibility instrument of the Kyoto Protocol, which is Joint Implementation (JI). At the end of 2008 there were no afforestation or reforestation projects in the pipeline (UNEP Risoe, 2008). A possible reason for this lack of interest on the part of Annex I countries in investing in forestry in other Annex I countries is that it is not cost-effective. 7.5.1

The Future of the CDM

There has already been a great deal of effort expended in the development of rules and methodologies for afforestation and reforestation. A change in these basic rules would undermine the investments already made in A/R. It is suggested that the A/R provisions in the CDM should be retained, while accepting the bankability of forestry credits, thus guaranteeing the viability of existing projects and encouraging new investment. This policy recognizes implicitly that while improvements can be made at the margin, the role of A/R in the CDM will in all probability remain a limited one; as a consequence the role of A/Rs in the CDM in reducing the costs of compliance with caps will probably continue to be limited relative to other types of offsets. The greatest change that could be made in a post-Kyoto Protocol is the inclusion of reduced deforestation and degradation (REDD) to apply to both developing and developed countries. Given that some 15–20 percent of greenhouse gas emissions are caused by deforestation in tropical developing countries this inclusion has the potential to contribute substantially to the UNFCCC goal of stabilizing atmospheric GHG concentrations. The arrangements that could be made to include REDD are the subject of Chapter 8, including both market and non-market approaches to its funding.

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7.6

Carbon sinks and climate change

POLICY FOR FORESTRY OFFSETS IN VOLUNTARY MARKETS

The voluntary market allows businesses, institutions and individuals to offset their GHG emissions by paying for abatement elsewhere. Voluntary offsets are outside the formal arrangements under the Kyoto Protocol, and as such the reductions in GHG achieved are not entered in a country’s carbon accounts and thus do not assist an originating country in meeting its emissions target. Nevertheless, the voluntary market is cheap to administer, depending on the rigor of verification and location, and as a whole the market is growing. A review of policies towards voluntary forestry offsets is included in this chapter because most offsets are originated by developed countries even though about half the projects are executed in developing countries. These projects allow small investors to contribute to projects in Asia, Africa and South America, marketed as providing carbon sequestration plus social and economic benefits to local communities. Such offsets projects may reduce deforestation as well as establishing new plantations. The contribution to biodiversity enhancement of forestry offset projects in developing countries can be said to be modest, however, unless they are certified under the Climate Community and Biodiversity Alliance. (Chapter 4 evaluates the biodiversity benefits of forestry offset projects.) In the case of forestry offset projects mounted in developed countries there is no guarantee that the social and biodiversity co-benefits claimed for forestry projects are any more than window-dressing, given that forestry monocultures generally lower costs and deliver more sequestered carbon per hectare than mixed species plantings. In Chapter 3 the negative trends in the volume of forestry offsets per se were linked to the fact that a large proportion of the market lacked rigor. Where forestry offsets are not verified by a third party, real possibilities exist for the double-counting of the sequestration benefits and exaggeration of the offsets achieved. The finalization of comprehensive rules for forestry in the Voluntary Carbon Standard, which is already the most favored standard in the market, suggests that buyers could be drawn back to forestry. But an issue that still needs to be resolved is the increase in transparency in the market with respect to timing of the forestry offset being sold, as emphasized in Chapter 3. Subsequent to the Bali Climate Change Conference there has been a surge of interest in the development of avoided deforestation projects (REDD). Where the voluntary market is likely to flourish is in the development of financial and technical instruments for delivering REDD in developing countries. Notwithstanding the difficulty of verifying that the

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forest would be lost without the project and that deforestation would not be shifted elsewhere, REDD has the advantage over plantation projects of delivering immediate emission abatement and potentially large biodiversity co-benefits. The development of standards for REDD, the involvement of the World Bank in piloting such projects, together with the interest shown by major financiers, augurs well for the growth in this segment of the voluntary market. Chapter 8 concludes that a funds-based approach to REDD, which could include investors large and small, would be more likely to succeed in the near future than a regulated market-based approach to REDD. The conclusion is that there will always be a market for voluntary carbon offsets that suit the needs of companies and industries, not to mention households that are not covered by mandatory schemes in reducing their carbon footprint. Buyers are also able to satisfy their desires for supplementary benefits, such as biodiversity conservation and sustainable development. The introduction of standards by the market that have the prospect of being widely adopted promises increased buyer confidence that the reduction in greenhouse emissions will actually occur. It would appear that the best policy is to allow the voluntary market to continue to self-regulate and thus increasingly to protect the investments of buyers and enhance the reputation of sellers.

7.7

SUMMARY AND CONCLUSIONS

Forestry has a major role to play in reducing the cost of compliance with emission reduction schemes in the US, Australia and New Zealand as well as in other countries that have yet to contemplate or announce targets. Deforestation is now very low in developed countries so that the in-country contribution will come from sequestration of carbon by afforestation and reforestation projects. The extent of the role of forestry will depend on the global price of emission allowances and this in turn will depend on the deepness of the cuts that nations embrace in the post-Kyoto regime. There is a distinct possibility that the combination of the increasing demand for land for afforestation and reforestation, combined with the increasing demand for land for biomass production for biofuels, will raise the price of food and disadvantage the poor. Policies will need to be modified if research shows that such a scenario is likely. It is apparent that non-Annex I countries, not subject to limitations under the Kyoto protocol, will soon, as a group, overtake Annex I countries as emitters of GHG emissions. For an international agreement to be effective in curbing global emissions, major emitting countries including

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principally the large emitters, India and China, will need to agree to GHG emission limits. If this were the case, the demand for forestry offsets in those countries could well be high depending on domestics policies adopted. An examination of forestry in the CDM, through which countries with Kyoto caps can reduce their compliance costs through projects in developing countries, suggested that the role of forestry offsets will always be limited. The recommendation of this chapter is to continue with the basic scheme but with some improvements. There is no time to lose in reducing deforestation in the tropical developing countries. The voluntary market is poised to make a contribution now that it is addressing the development of rules and transparency issues and given the strong motivation among developed countries to provide financial incentives.

REFERENCES Australian Government (2008), ‘Carbon pollution reduction scheme: Australia’s low pollution future’, White paper, Department of Climate Change, Canberra, Australia, available at http://climatechange.gov.au/whitepaper/report/index.html. Australian Government (2009), ‘New measures for the Carbon Pollution Reduction Scheme’, available at http://www.environment.gov.au/minister/wong/2009/ pubs/mr20090504.pdf. Berendt, C. (2008), ‘Gazing into the crystal ball’, Point Carbon, 2(9), 30–32. Commission of the European Communities (2008), ‘Addressing the challenges of deforestation and forest degradation to tackle climate change and biodiversity loss’, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regional Commission of the European Communities, CEC, Brussels. EU (European Union) (2008), ‘Climate change: IPCC report confirms EU call for deep cuts in global greenhouse emissions’, press release 4 May, EU, Brussels. EUROPA (2008a), ‘Will it be possible to use carbon credits from carbon sinks like forests?’, memo/08/35, available at http://europa.eu/rapid/pressReleasesAction. do?reference5MEMO/08/35&format5HTML&aged50&language5EN&guiL anguage5en. EUROPA (2008b), ‘Climate change: Commission endorses Poznań declaration on reducing emissions from deforestation’, available at http://europa.eu/rapid/ pressReleasesAction.do?reference5IP/08/1965&format5HTML&aged50&lan guage5EN&guiLanguage5en. Garnaut, R. (2008), ‘Garnaut climate change review’, available at http://www. garnautreview.org.au/index.htm. Höhne, N., S. Wartmann, A. Herold and A. Freibauer (2007), ‘The rules for land use, landuse change and forestry under the Kyoto protocol: lessons learned for the future climate negotiations’, Environmental Science and Policy, 10, 353–69.

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Lawson, K., K. Burns, K. Low, E. Heyhoe and H. Ahamamad (2008), ‘Analyzing the economic potential of forestry for carbon sequestration under alternative carbon price paths’, Canberra, Australia: Australian Bureau of Agricultural and Resource Economics. McCarl, B., H. Lee, D. Gillig, D. Adams, K. Andrasko, R. Sands, U. Schneider, B. Murray, R. Alig, B. Deangelo and F. Delachesnaye (2002), ‘Assessment of GHG mitigation opportunities in the US forest and agricultural sectors’, available at http://epa.gov/sequestration/mitigation_national.html. McKinsey (2007), ‘Reducing US greenhouse gas emissions; how much at what cost’, New York, NY: The Conference Board. Ministry for the Environment (2008), ‘Major design features of the emissions trading scheme’, Wellington, New Zealand: Ministry for the Environment. Nabuurs, G., O. Masera, K. Andrasko, P. Benitez-Ponce, R. Boer, M. Dutschke, E. Elsiddig, J. Ford-Robertson, P. Frumhoff, T. Karjalainen, O. Krankina, W. Kurz, M. Matsumoto, W. Oyhantcabal, N. Ravindranath, M. Sanz Sanchez and X. Zhang (2007), ‘Forestry’, in: B. Metz, O. Davidson, P. Bosch, R. Dave and L. Meyer (eds), Climate Change 2007: Mitigation, contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge, UK and New York: Cambridge University Press, pp. 541–84. Neeff, T., L. Eicher, I. Deecke and J. Fehse (2007), ‘Update on markets for forestry offsets’, Tropical Agricultural Research and Higher Education Center (CATIE), Turrialba, Costa Rica. Obama, B. (2008), ‘New energy for America, 2008’, available at http:// my.barackobama.com/page/content/newenergy. Point Carbon News (2008), ‘Investors pull out of NZ carbon projects’, Point Carbon News, 1(3), 2–3. Regional Greenhouse Gas Initiative (2008), RGGI, available at http://www.rggi. org/states. Sathaye, J. and P. Chan (2008), ‘Costs and carbon benefits of global forestation and reduced deforestation in response to a carbon market’, Report for the Australian Government Treasury, available at http://www.treasury. gov.au/lowpollutionfuture/consultants_report/downloads/Global_Forestation. pdf. Sathaye, J., W. Makundi, L. Dale, P. Chan and K. Andrasko (2007), ‘GHG mitigation potential, costs and benefits in global forests: A dynamic partial equilibrium approach’, Energy Journal, Special Issue, 3,127–72. Schlamadinger, B., N. Bird, T. Johns, S. Brown, J. Canadell, L. Ciccarese, M. Dutschke, J. Fiedler, A. Fischlin, P. Fearnside, C. Forner, A. Freibauer, P. Frumhoff, N. Hoehene, M. Kirschbaum, A. Labat, G. Marland, A. Michaelowa, L. Montanarella, P. Moutinho, D. Murdiyarso, N. Pena, K. Pingoud, Z. Rakonczy, E. Rametsteiner, J. Rock, M. Sanz, U. Schneider, A. Shvidenko, M. Skutsch, P. Smith, Z. Somogyi, E. Trines, M. Ward and Y. Yamagata (2007a), ‘A synopsis of landuse, land-use change and forestry (LULUCF) under the Kyoto Protocol and Marrakech Accords’, Environmental Science and Policy, 10, 271–82. Schlamadinger, B., T. Johns, L. Ciccarese, M. Braun, A. Sato, A. Senyaz, P. Stephens, M. Takahashi and X. Zhang (2007b), ‘Options for including land use in a climate agreement post-2012: improving the Kyoto Protocol approach’, Environmental Science and Policy, 10, 295–305.

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UNEP (United Nations Environment Programme) Risoe (2008), ‘CDM pipeline spreadsheet’, available at http://cdmpipeline.org/overview.htm. UNFCCC (United Nations Framework Convention on Climate Change) (1992), ‘United National Framework Convention on Climate Change’, Article 2, available at http://unfccc.int/resource/docs/convkp/conveng.pdf. UNFCCC (United Nations Framework Convention on Climate Change) (2006), ‘Report on the Conference of the Parties, 28 November – 10 December 2005, Montreal, Decision 16/CMP, Annex, D. Article 12, Para.14, 30 March, FCCC/ KP/CMP/2005/8/Add.3 available at http://unfccc.int/resource/docs/2005/cmp1/ eng/08a03.pdf#page53. United Nations (1998), ‘Kyoto Protocol to the United Nations Framework Convention on Climate Change’, New York: United Nations. USEPA (United States Environment Protection Agency) (2005), ‘Greenhouse gas mitigation potential in US forestry and agriculture’, Washington, DC: USEPA. USEPA (United States Environment Protection Agency) (2008), ‘US Environmental Protection Agency analysis of the Lieberman-Warner Climate Security Act of 2008’, available at http://www.epa.gov/climatechange/economics/economicanalyses.html. van Kooten, G. and B. Sohngen (2007), ‘Economics of forest ecosystem carbon sinks: a review’, International Review of Environmental and Resource Economics, 1(3), 237–369. Western Climate Initiative (WCI), (2008), ‘Draft design recommendations on the elements of the Cap-and-Trade Program’, available at http://www.westernclimateinitiative.org/. World Resources Institute (2008), ‘Climate Analysis Indicators Tool (CAIT)’, WRI, available at http://cait.wri/org/cait.php.

8.

Policies for reducing emissions from deforestation and forest degradation (REDD)

The first part of this chapter discusses the mechanisms that have been put forward to account for the reduction in deforestation and forest degradation (REDD) in developing countries and to reduce the risk associated with the impermanence of forests and the leakage of deforestation to other locations. It also reviews funding mechanisms that are being considered. The second part takes a hard look at REDD, examining the political economy in which deforestation is embedded, the socioeconomic implications of REDD and the prospects for its effective financing and implementation. Under the Kyoto Protocol (United Nations, 1998, Article 2), Annex I countries with quantified emissions limitations and reductions are bound to promote sustainable forest management practices, afforestation and reforestation. Land use and forestry practices within Annex I countries can contribute substantially to reducing the costs of achieving national emissions caps, as discussed in theory in Chapter 1 and in relation to in-country policy in Chapter 7. Annex I countries also have the option of using the Clean Development Mechanism to mount forestry projects in developing countries to reduce their costs of compliance. However, deforestation takes place almost exclusively in non-Annex I tropical developing countries that are not subject to limits on their emissions (Figure 8.1), and is responsible for global carbon emissions of some 1.35 Gt per year, equal to about a fifth of global emissions generated by the burning of fossil fuels (Figure 8.2). If deforestation remains unchecked it is likely to increase steadily due to the demands for agricultural products by growing local and global populations (Figure 8.3). Tropical developing countries are unlikely to accede to caps on their emissions and they will therefore lack a built-in incentive to reduce deforestation. Therefore special measures must be designed for REDD. Specific proposals that included incentives or compensation for avoiding deforestation and forest degradation began to come forward in 2005 when Papua New Guinea, Costa Rica and several other countries proposed 187

GtC yr–1

188

Carbon sinks and climate change 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 –0.1

Source:

1980s 1990s

0.6

0.8

0.7

0.6 0.2

Tropical America

0.3

0.06

Tropical Africa

Tropical Asia

–0.02

Non-tropics

IPCC (Solomon et al., 2007: Table 7.2: 518).

Figure 8.1

Carbon emissions to the atmosphere from land-use change, mean estimates for the 1980s and 1990s

Tropical deforestation, 1.35

Fossil fuel burning, 6.3

Sources:

The mean estimate is the mean of Achard et al. (2004) and Houghton (2005).

Figure 8.2

Carbon emissions to the atmosphere in the 1990s, mean estimates, GtC yr21

that REDD should be included in future climate agreements (UNFCCC, 2005). The eleventh session of the Conference of the Parties of the United National Convention on Climate Change (UNFCCC) in Montreal in 2006 set in train a two-year process to review the scientific, technical and methodological issues, as well as policy and positive incentives for REDD in developing countries. The UNFCCC’s Subsidiary Body for Scientific and Technological Advice (SBSTA) was active in policy development, holding three workshops on REDD, in 2006, 2007 and 2008 (UNFCCC, 2006; 2007; 2008a).

Policies for reducing emissions from deforestation

Hectares per year, millions

14

189

13.1

12 11

10 8 6.9

6 4 2 0

1990–2000

2000–2010

2010–2020

Note: This forecast takes account of the agricultural expansion required by an increasing population, but does not include conversion of forests for bioenergy. Source:

Mollicone et al. (2007).

Figure 8.3

Forecast of global net annual forest area loss under ‘businessas-usual’ i.e. no intervention

At its Conference of the Parties (COP) 13 in Bali in December 2007, the UNFCCC decided to further stimulate action to reduce emissions from deforestation in developing countries through the Bali Action Plan. The plan launched a process that will enhance national/international action to mitigate climate change, culminating in an agreed outcome and decision at its fifteenth meeting in Copenhagen in 2009. The plan considers: ●

●

Nationally appropriate mitigation actions by developing country parties in the context of sustainable development supported and enabled by technology, financing and capacity-building in a measurable, reportable and verifiable manner. Policy approaches and positive incentives on issues relating to reducing emissions from deforestation and forest degradation in developing countries; and the role of conservation, sustainable management and enhancement of forest carbon stocks in developing countries (UNFCCC, 2008b: 3).

The impetus for the inclusion of REDD in a scheme to succeed the Kyoto Protocol is enhanced by the relative effectiveness of reducing deforestation as opposed to afforestation and reforestation. Planted trees take decades to reach their full carbon storage capacity and face many hazards on the way that can limit their potential. Moreover, after a certain age the plantation forest may well deteriorate and become a net emitter

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of greenhouse gases. In contrast, where the deforestation of a hectare of primary tropical forest is avoided there is an almost immediate prevention of emissions of several hundred tonnes of GHGs, especially where the forest is burnt before being converted to agriculture. Intact primary tropical forests are generally old and in carbon equilibrium and, if not disrupted by climate change and direct human activity, could be managed to retain their carbon in perpetuity. In addition, the preservation of tropical forests maintains biodiversity and the delivery of vital services such as local climate moderation, watershed protection and maintenance of inshore water quality. Another factor that has re-ignited interest in the potential for forestry is the assertion that REDD would generate substantial reductions in emissions cheaply and quickly (Stern, 2006). Before discussing policy for REDD, it is instructive to first consider the complex nature of causes of deforestation and degradation. Causes may be classified as proximate and underlying (Lambin and Geist, 2003). The nature of the proximate causes of deforestation differs greatly from country to country and locality to locality. A major proximate cause is the expansion of agriculture. The conversion of forests to oil palm and other highly profitable crops is a major cause of deforestation in Indonesia and Malaysia; in South America it pays to convert large areas of forest to pasture for cattle grazing and soybeans for export; in Africa small-scale subsistence agriculture is a major driver. The extraction of wood and extension of infrastructure such as settlements and roads are also major proximate causes of deforestation. The proximate causes reinforce each other. For example logging roads allow access to logged land that can be more easily burned, cultivated and colonized. The powerful underlying factors of growth in population and increasing consumption per capita lead to the increase in demand for agricultural commodities. At the same time national policies favor exploitation of the forest resource and the development of large-scale plantations, and these are facilitated by globalized capital and product markets together with improved technology in extraction of forest resources. The inability of weak governments to police logging and forest clearing, together with the propensity for government dealings in forest concessions to be corrupted, add to the underlying pressures for deforestation. Property rights with respect to land and forest constitute an important factor that may serve to vary the causes of deforestation and forest degradation. In most tropical developing countries the land and forest is ostensibly owned by the government. But this by no means precludes the exploitation of forests and lands by local communities who may have depended on these resources for many generations. The infinite variations and combinations in proximate and underlying

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causes of deforestation and forest degradation mean that there is no silver bullet solution. Nevertheless, the provision of incentives for REDD has the potential to alter the crucial economic equation by increasing the opportunity cost of forest conversion, thereby affecting proximate decisions on land conversion and also underlying decisions on agricultural policy. Some prominent proposals for REDD that are on the table are now reviewed.

8.1

PROPOSALS FOR REDD ACCOUNTING

Deforestation is already accounted for under the Kyoto Protocol for the industrialized Annex I countries. Where deforestation was a net source of emissions in 1990, then the deforestation in the first commitment period 2008–12 is measured against the 1990 level. This is termed ‘net–net’ accounting. In applying REDD to developing countries the same net–net principle can apply of measuring emissions from deforestation or degradation for an accounting period against a previous base period. One of the major obstacles to the inclusion of REDD in the Clean Development Mechanism of the Kyoto Protocol was the problem of being certain about how much deforestation has been avoided. Baselines are a tool to assess performance in REDD and to determine target levels that go beyond what would have been achieved. Deforestation rates may already be declining in a country and may go on declining as the areas of forest available for profitable agriculture decline. There is a very real risk in this situation that the baseline will be set too high and REDD will be rewarded for reductions in emissions that would have taken place anyway. In Costa Rica, according to Karousakis (2007), deforestation rates were already on the decline in the 1990s, which casts doubt on the validity of payments for environmental services in that country. The base periods need to be set over a period long enough to minimize the problems of using remote sensing due to cloud cover and inter-annual variation in deforestation rates. Over the last 15 years Amazonian annual deforestation rates have varied from 1 million to 3 million hectares (Instituto Nacional de Pesquisas Espaciais, 2005). Radar remote sensing can be used in areas with frequent cloud cover to verify annual forest stocks. In all cases it is preferable to couple remote sensing with field data, as was emphasized in Chapter 5. Given the inter-year variability of deforestation within countries, the baseline suggested by Mollicone et al. (2007) is 1990 to 2005 with the average conversion rate per year derived from the satellite imagery survey at the start (1990) and the end (2005) of the period. This proposal provides

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incentives only if the rate of global deforestation in the accounting period is less than the rate in the baseline period. Here ‘global’ refers to the sum of the participating countries or all countries. The baseline is lowered for successive accounting periods. If a country has a deforestation rate higher than half the global rate during the baseline period then it is a high conversion rate country. If this country has a reduced conversion rate (conversion rate in accounting period less than conversion rate in baseline period) then it has preserved carbon calculated according to forest type (humid tropical, dry tropic) and forest category (intact, non-intact). If a country has a conversion rate less than half the global rate then it is a low conversion country and its reduced deforestation rate is the difference between the global rate and the national rate during the accounting period. These two situations are compared in Figures 8.4a and 8.4b. The Mollicone et al. (2007) approach prevents countries receiving incentives when global deforestation rates are above the baseline. The net global incentive is apportioned among countries according to their performance. In a different approach by Santilli et al. (2005) an incremental increase in deforestation rate in a country in the accounting period above baseline would be transferred to the next commitment period.28 In heavily logged regions such as Kalimantan, Sumatra and Sulawesi, for example, where much of the lowland forest has been removed after logging to make way for oil palm plantations, crediting for increase in carbon stocks in a commitment period could include reforestation or regrowth. In the case of countries with substantial forests but very little deforestation, for example Peru and Bolivia, the approach is to allow baselines higher than their recent deforestation rates as an inducement to participate and avoid future increases.29 Schlamadinger et al. (2005) emphasize the crucial importance of setting targets against which future emissions are assessed that, on the one hand, are not so low as to allow a country to claim credits simply by following a business-as-usual approach and, on the other, are not set so high as to be unachievable. The authors also ask the crucial question ‘should nonachievement of targets lead to penalties?’ (Schlamadinger et al., 2005: 57), given that such penalties may deter countries from participating in the REDD scheme. The Schlamadinger et al. (2005) proposal rejects penalties and instead opts for graduated incentives for achieving REDD within a band which encompasses achievable targets based on projected emissions rather than historical levels. If emissions from REDD are below the lower threshold the country can claim full credit for each tonne of CO2e reduced. Emissions below the upper band would be discounted, the discount rate

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Conversion rate

(a)

Credit

GC/2

Baseline

Accounting

Conversion rate

(b)

Credit

GC/2

Baseline

Accounting

Notes: (a) country with conversion rate of forest above half the global rate (GC/2) in the baseline period is credited with a reduction below its baseline in the accounting period (b) country with conversion of forest below half the global rate (GC/2) in the baseline period is credited for staying below GC/2 in the accounting period Source:

After Mollicone et al. (2007: Figure 5).

Figure 8.4

Comparison of countries with conversion rates of forest above and below half the global rate

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Past emissions

Upper target of target band

0 Lower target of target band

1 Credits

Time Note: Expected emissions are the basis for setting the upper and lower targets of the target band (dotted lines). The smaller graph shows the changing fraction of each tonne of emissions avoided that can be sold as a credit. In achieving the lower target all credits are sold, while at the upper target level no credits can be sold. Source:

After Schlamadinger et al. (2005: Figure 1).

Figure 8.5

Credit allocation for achieving REDD targets

decreasing as emission levels approach the lower threshold. How discounts would apply to credits in the target band is illustrated in Figure 8.5. 8.1.1

Accounting for Emissions from Degradation

Under the Kyoto Protocol forests are defined as lands with more than 10 to 30 percent crown cover (UNFCCC, 2001). Carbon pools will thus consist of forests with 100 percent tree canopy down to 10 percent tree canopy. The degradation of a forest through selective logging, shifting agriculture or livestock grazing, seriously undermining its carbon content, may escape detection by remote sensing technologies (DeFries et al., 2007). Emissions from land-use conversions were estimated to be 25 percent greater in the Amazon when forest degradation is included (Asner et al., 2005). Carbon loss within forests could in fact exceed the conversion of forest to nonforest. It is therefore imperative that carbon loss caused by degradation within forests is accounted for as well as that from the conversion of forests. Published data for the non-intact class of forests is unavailable, yet carbon stocks need to be estimated before the start of the accounting period.

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195

An operational method to deal with forest degradation is proposed by Mollicone et al. (2007). The distinction is made between intact and non-intact forests, thus avoiding the introduction of a definition of forest degradation that has not been achieved. Using remote sensing, intact forest is discriminated from non-intact forest by the presence of human interference such as roads and fragmentation. Forest conversion is defined as: 1. 2. 3.

from intact forest to other land use; non-intact forest to other land use; intact forest to non-intact forests.

The Mollicone et al. (2007) proposal defines avoided deforestation as the difference between the sum of the preserved forest carbon stocks arising from the three processes above and the agreed national or global baseline. Once the areas of three categories have been determined, their carbon stocks are determined by reference to the literature for the particular forest type, for example humid tropical, dry tropical, and so on. In the absence of data for non-intact forests the carbon stock of non-intact forests is set at half that of intact forests. 8.1.2

Development of Methodologies for Measuring Deforestation and Degradation

At its third workshop (UNFCCC, 2008a) the SBSTA reached general agreement that robust and cost-effective methodologies, designed and implemented at the national level, are required to estimate and monitor the following: ● ● ●

changes in forest cover, associated carbon stocks and emissions; incremental changes due to sustainable management of forest; reduction of emissions from deforestation and forest degradation.

To achieve this, a coupling of remote-sensing and ground-based assessment is a suitable approach. Measuring emissions from forest degradation is more difficult than from deforestation and there is a need for methodological development in this area. While the IPCC guidelines and good practice guidance provide methodologies that can form a basis for estimating and monitoring emissions reduction and forest degradation, there is an essential need to increase the technical capacities of developed countries to do so. Policy development and institutions also need strengthening.

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It is unlikely that there is sufficient time to gather a great deal more field inventory data before the Kyoto first commitment period expires in 2012. Therefore it is imperative that the most is made of existing data available (Gibbs et al., 2007; Olander et al., 2008); see Chapter 5. Chapter 5 concluded that grant programs will be crucial to assist developing countries in using a combination of data and technology in developing comprehensive ‘wall to wall’ information on carbon in forest strata and rates of deforestation. Unless such credible scenarios can be developed for tropical deforesting countries, REDD will not become a reality.

8.2

PERMANENCE

The question of the permanence of carbon sequestered in forests was one of the reasons the Marrakesh Accords exclude deforestation under the CDM; how the problem might be addressed is considered in this section. There is no essential difference between a stock of carbon that has been accumulated by removal of CO2 by afforestation/deforestation and the stock of carbon whose release to the atmosphere has been avoided by REDD. While it can be argued that the carbon in plantations may decline with age while the carbon in mature rainforest is in equilibrium, both types of carbon sinks are nevertheless subject to similar risks from clearing, fire, insect attack or climate change. In the Clean Development Mechanism (CDM), the developing country that hosts the afforestation/reforestation (A/R) project is not liable for any re-emission, given that it does not have a national cap on its emissions. Non-permanence in A/R CDM projects has been addressed by means of making CERs temporary, the investor being liable to replace the carbon that has been credited. The temporary CERs simply provide a bridge over time and not a reduction per se, as illustrated in Chapter 2. The Mollicone et al. (2007) approach to REDD adopts temporary CERs where the buyer of the REDD credits must renew them on a regular basis. If the forest is depleted, the liability falls back on the buyer who must purchase carbon elsewhere to make up for the shortfall. Skutsch et al. (2007) agree that temporary crediting schemes may prove to be indispensible again, having been essential to reach consensus within the UNFCCC in the past with respect to forestry activities in the CDM. One important feature distinguishes REDD credits from CDM credits and that is that the former will be accounted for in a tropical country national inventory rather than a project inventory, as in the latter. The issue of temporary CERs may therefore be avoided by the national government issuing a guarantee through its pooling of protected forests,

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197

keeping part of the pool as a buffer against non-permanent REDD. In the case of compensation proposals, as epitomized by Santilli et al. (2005), the host country must assume full liability for its carbon stocks, not only for the commitment period during which credits were issued but also for all future commitment periods. The initial decision to participate is voluntary but the subsequent liabilities would need to be made mandatory (Schlamadinger et al., 2005).

8.3

LEAKAGE

One of the biggest challenges in developing a credible system for compensating for REDD in developing countries is that of reducing the risks of leakage. Where REDD is effected in one location there may be a stimulus to greater deforestation in another location. This is a high risk with project-based REDD schemes that have difficulty taking account of trends outside the immediate project area. This issue of indirect effects of REDD was one of the reasons for the exclusion of deforestation in the Marrakesh Accords. The participants at the second UNFCCC (2007) workshop, as well as Mollicone et al. (2007) and Santilli et al. (2005), preferred the adoption of national accounting, rather than project accounting. Any leakage from one area to another would be accounted for in the process of drawing up national accounts for emissions from deforestation. The problem of international leakage remains, however. Multinational logging and oil palm companies, for example, might respond to constraints on their activities in developing countries that have voluntarily opted for REDD targets by increasing their activities in countries that have not adopted targets. Such a scenario emphasizes the importance of including a large proportion of forested developing countries in a postKyoto REDD scheme. In general an understanding of the proximate and indirect causes of deforestation and forest degradation in any particular situation will enable leakage problems to be anticipated and perhaps countered. As Ebeling and Yasué (2008) point out, low-cost measures are available such as governments enforcing existing land regulations and conservation regulations, extending indigenous territories and removing subsidies for land clearing. A question arises though whether a REDD scheme would have much impact where profitable logging is followed by conversion to profitable cropping, given that investors and participating countries will be looking to identify projects where emissions reductions can be had at low cost. Where compensation is relatively expensive but there are imperatives for conservation of forests on biodiversity grounds, such as in Borneo

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and Kalimantan, a combination of REDD and conservation funds could raise the level of compensation sufficiently to make the avoidance of deforestation an attractive alternative to logging and conversion.

8.4

MARKET AND NON-MARKET FUNDING MECHANISMS

Many funding proposals suggest the use of voluntary contributions to provide the financial resources for a REDD fund. Such funding sources identified in the second UNFCCC workshop (UNFCCC, 2007) include: ● ● ● ● ●

●

overseas development assistance; voluntary contributions from NGOs and governments; private sector sponsorships and donations; new and additional sources under the UNFCCC; funds created under the UNFCCC and the Kyoto Protocol (for example the Special Climate Change Fund, the Adaptation Fund) and the Trust fund of the Global Environment Facility; taxes on carbon-intensive commodities and services.

The advantages of non-market funds are that they: ● ● ● ● ●

do not devalue the price of existing tradable carbon; do not divert financial resources from the control of major sources of GHG emissions; do not threaten to reopen the difficult and drawn out discussions of the Marrakesh Accords; reduce the need for Annex I parties to use offsets against their emissions targets; provide for an early start on REDD given that REDD will not operate under the Kyoto Protocol in the first commitment period 2008–12 (UNFCCC, 2007).

The basis of market approaches is the generation of credits from REDD in developing countries that can be used by countries with capped emissions for meeting their commitments. The broader the scheme in its coverage of sources and sinks of carbon, such as forests, the lower the costs of compliance. An increase in demand for credits would be generated by deeper reduction commitments by countries post-2012. The following advantages of market-based instruments were advanced at the second workshop (UNFCCC, 2007: 15).

Policies for reducing emissions from deforestation ●

●

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Provide incentives for the engagement of the private sector in project-based regional and national approaches and augment the volume of non-market funds which has been inadequate. Units of trade must all equal one tonne of emissions reduced or avoided and market systems require robust carbon accounting systems which increase the credibility and value of ensuing credits.

Several commentators suggest that market-based mechanisms that allow Annex I countries to offset their emissions against REDD have the potential to provide the necessary continuity and volume of funds (see for example Karousakis and Corfee-Morlot, 2007 and Skutsch et al., 2007). A question that needs to be resolved is the desirability for a limitation on the number of credits that could be generated by REDD, similar to the limitation on CERs generated by the CDM in the first commitment period. The work of Jung (2005) was reviewed in Chapter 3 and this tended to confirm fears that the inclusion of REDD in the first commitment period would have diluted the market and lowered the price of carbon credits, thus relieving the need for Annex I countries to make reductions in emissions in their energy sectors. One way of limiting the need for a cap on REDD credits would be for the overall emission target of Annex I countries to be negotiated, while at the same time taking account of the level of REDD credits that could be forthcoming (Skutsch et al., 2007). The proposals of Mollicone et al. (2007) and Santilli et al. (2005) assume that credits would only be sold after they had been verified as having been achieved, as with certified emission reductions of afforestation and deforestation under the CDM. (This is in contrast to forestry offsets in the voluntary market that are invariably sold ex ante, that is before they have yielded verified sequestered carbon: see Chapter 3.) For the initiation of projects, financing would be needed against future carbon credits. As Schlamadinger et al. (2005) note, there is no reason why national governments could not sell options to REDD credits before a program is in place. Such up-front financing would facilitate the initiation of projects by developing countries themselves. The governments or companies could then elect to buy the actual credits when the program is completed. To reduce the risk of selling options that do not materialize, only a proportion of the credits expected could be pre-sold, or insurance could be taken out against program failure. Such pre-financing could be done through the World Bank, as in the case of CDM projects or by the host country selling carbon credit options, the revenue being directed at REDD programs. Once the program yields credits, the investors could then decide to buy the credits.

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8.5

REALITY CHECK (POLITICAL, ECONOMIC AND FINANCIAL) ON REDD

This section attempts to confront the political, social and economic realities that face efforts to reduce deforestation and forest degradation. Policy failure is the inevitable outcome of ignoring these realities. Williams (2003: 495) reminds us of the pressures from population growth, especially in tropical countries: World population will continue to rise. . .stabilizing at between 9 and 10 billion by 2100. The bulk of the 3 to 4 billion extra people will be in the developing world and primarily in the tropical forest zone. [A]s cultivation has always been the prime devourer of forests, many millions of hectares will be destroyed. Similarly the demand for fuel wood will remain immense for the poor of the world.

Williams (2003: 498) goes on to say how the past has shed some light on present processes: [T]ime and again we have seen that it is the underlying social, economic and political makeup of society at any given time – ‘its cultural climate’, no less – that causes deforestation. We know far less about what brings deforestation under control, except that experience suggest the need for strong government institutions to implement stated policies and resist elite groups who have traditionally pursued the exploitation of the forest.

The prospects for meeting the condition of strong institutions seem bleak in many key tropical countries, as highlighted in the next section. 8.5.1

Governance, Failed States and Corruption

The level of deforestation is much higher in least-developed countries than in developing countries as a whole, as illustrated in Figure 8.6. These countries are likely to have a lower level of resources available to tackle deforestation. There are also impediments of poor governance. Tacconi (2007a) matched the level of deforestation with governance conditions in the top ten countries for deforestation. All of the top ten have a high corruption index and five are failed states (see Table 8.1). Failed states are characterized by severe security problems, making it difficult if not impossible to initiate successful deforestation avoidance programs. Barbier et al. (2005) estimated that corruption explained between 11 and 30 percent of deforestation in tropical developing countries. The kind of debilitating impact that corruption could have on the potential of tree planting in developing countries to tackle climate change

Policies for reducing emissions from deforestation N2O F-gases 2% 6%

LUCF 0%

CH4 11%

N2O F-gases 0% 10%

CH4 16% Fossil fuels 81%

Developed

Fossil fuels 41%

N2O 12%

Fossil F-gases fuels 0% 5%

CH4 21% LUCF 62%

LUCF 33%

Developing

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Least developeda

Notes: a ‘Least Developed’ is a subset of ‘Developing’. F-gases 5 fluorinated gases. LUCF5 land-use change and forestry. Source:

Beaumont et al. (2005).

Figure 8.6

Greenhouse gas emissions of developed and developing countries, 2000

is illustrated by a study of the geographical distribution of carbon sequestration costs by Benitez et al. (2007). The authors recognized that country risk is bound to be a major concern of investors in forestry offsets in developing countries. These risk factors were translated by Benitez et al. (2007) into discount rates for various countries on investment in, and supply of, sequestered carbon. At a carbon price of US$50 per tonne of carbon, or US$13 per tonne of CO2e, the base estimate of sequestration globally over 20 years was 25 Gt of CO2e, or an average of some 1.3 Gt per year. After application of the discount factors reflecting risk, the estimate fell by 59 percent to 10 Gt CO2e over 20 years, or some 0.5 Gt per year. 8.5.2

Lessons from Illegal Logging

Illegal logging is pervasive and needs to be tackled in a comprehensive approach to REDD. In the Brazilian Amazon roughly 80 percent of all timber cutting is illegal, with no effective control over harvest operations or payment of government royalties (Laurance, 1998). The task of controlling illegal logging is complex: Ibama, Brazil’s environment agency, has a small number of officials to police a vast region. Last year it collected just 6 percent of the fines it levied. . .But a

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Table 8.1

Governance in the top ten countries for deforestation Deforestation Annual Contribution Corruption Failed Indexa 2000–2005 deforestation to global state sq km (%) deforestation (%)

Brazil Indonesia Sudan Myanmar Zambia Tanzania Nigeria Democratic Republic of Congo Zimbabwe Venezuala

155,150 93,570 29,450 23,320 22,240 20,610 20,480 15,970

0.6 1.9 0.8 1.3 1.0 1.1 3.1 0.2

24.1 14.5 4.6 3.6 3.4 3.2 3.2 2.5

3.60 2.25 1.75 1.40 2.60 3.15 2.25 1.95

No No Yes Yes No No Yes Yes

15,560 14,380

1.6 0.6

2.4 2.2

2.10 2.00

Yes No

Note: a The lower the Corruption Index (with a range of 1 to 10), the higher the corruption level. For example Australia, which had a high rate of deforestation in 2000– 2005, and qualified 16th with almost 10 000 sq km of deforestation, had a corruption rating of 8.55. Source:

Tacconi (2007a: Table 1).

visit to a town such as Paragominas suggests that effective enforcement would take a lot more than hiring extra inspectors. The atmosphere is that of a frontier region where no one quite knows who owns the land and property disputes are often settled by violence. Everyone milks the forest for what they can get. (The Economist, 1998: 3)

In Indonesia, logging might be illegal under the central government but because of the fragmented nature of district governments under the policy of regional autonomy, collusive corruption is more pervasive in the post-Suharto era, enabling illegal logging to flourish. Local business elites are influential in the decentralized administrations that take formal decisions favoring the interest of the elites and those of their business partners outside the region (Curran et al., 2004; McCarthy, 2007). The failure of enforcement of protected areas is a key reason for the loss of orangutan habitat (Rijksen and Meijaard, 1999). In Kalimantan illegal extraction and processing of timber is an extensive and deeply entrenched system and the clearing for agriculture is pervasive with some 50 percent of the protected forest in the Indonesian

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part of Kalimantan being deforested between 1985 and 2001 (Casson and Obidinski, 2007; Curran et al., 2004). The International Tropical Timber Organization committed to implementing sustainable forest management by the year 2000. But only about 7 percent of natural forest in the permanent estate of member countries was managed sustainably as of 2005 (ITTO, 2006). The lack of commitment to sustainable forest management by governments is because it yields lower economic benefits than the conversion of forest to other uses (NortonGriffiths and Southey, 1995). The World Bank’s definition of illegality is a broad one, including timber theft, evasion of taxes and fees, to non-compliance with labor and environmental laws. In 17 countries surveyed, two-thirds had illegal logging rates of at least 50 percent. The annual losses in global market value from illegal cutting of forests was estimated at over $10 billion and annual losses in government revenues about $5 billion (World Bank, 2007). The Bank emphasizes the need to control indirect drivers of illegal logging such as the failure of law and of law enforcement. The politically well-connected interest groups tend to benefit from the status quo and will actively resist change. At the same time law enforcement must ensure that the forest-dependent poor are not unfairly punished. The section now turns to consider socioeconomic aspects of REDD that may not have achieved the prominence that they deserve. There is a consideration of the comprehensiveness of the information that led Stern (2006) to suggest that curbing deforestation would be cheap. 8.5.3

The Socioeconomics of REDD and the Costs of Avoiding Deforestation

A key parameter in the models of forestry supply responses to prices for sequestered carbon in developing countries is the level of income that will be forgone by landowners in switching to forest conservation. The supply of land for forestry will depend on the costs and benefits of conserving forest as opposed to clearing it for agriculture. A payment to the government for REDD credits needs to be translated to payments to the communities that are using the land. Funds may be redirected at programs to improve the productivity of agricultural land so that deforestation is suppressed by addressing its underlying causes (Schlamadinger et al., 2005). The full opportunity costs are not always included in modeling the potential for forests as carbon sinks, the costs including only those of maintaining the forested area or in the case of afforestation/reforestation, of planting and maintaining forest. In a large analysis of land-use change studies, van Kooten et al. (2004) found that where opportunity costs were

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taken into account costs rose three to five times compared with studies that did not. Moreover, studies that did include opportunity costs in estimating supply of carbon sequestration included average costs rather than marginal costs. As more forest is conserved the marginal opportunity cost rises, perhaps well above average costs. The cost of conserving forest or planting forest at the margin may well be the indicative costs as far as landowners are concerned (van Kooten et al., 2004). In estimating the opportunity costs of forest conservation, Grieg-Gran (2006) focused on eight countries with large areas of tropical forest: Bolivia, Brazil, Cameroon, Democratic Republic of Congo, Ghana, Indonesia, Malaysia and Papua New Guinea. Annual net forest loss in these countries averaged 6.2 million hectares over the period 2000–2005, amounting to just under half of FAO’s estimate of total global deforestation. Applying the estimates of Kinderman et al. (2008) of the carbon emissions avoided per hectare in the tropical forests of Central and South America, Africa and South-east Asia to the Grieg-Gran (2006) data enables the calculation of the cost per tonne of emissions avoided: an average cost of US$3.8 per tonne of carbon dioxide equivalent (CO2e).30 The results of the Grieg-Gran (2006) study led Stern (2006) to assert that large quantities of CO2e abatement was available in tropical countries at a low cost. Grieg-Gran (2006) estimated the total cost of compensation of $6.5 million for 6.2 million hectares would need to be paid in each year, and administration costs for this scenario by year 10 were reckoned to range between $250 million to just under $1 billion, but the total cost suggested is still a very small price to pay for the 2.6 Gt of CO2e emission avoided. To gain an appreciation of the amount of compensation that might be required for agriculture it is, however, necessary to look beyond matching the crop returns at the smallholder or estate level. By some industry estimates, Indonesian and Malaysian palm oil exporters took in about $20 billion in 2007 from global sales (Wright, 2008). But palm oil is not only profitable for private investors, growers, processors and exporters; it also contributes to public revenues and employment. In 2007, palm oil export revenues in Malaysia and Indonesia amounted to $14 billion and $5.5.billion respectively (AFP, 2008; Wright, 2008). Government coffers also benefit by taxing producers on land and the palm oil processors. In addition, the generation of employment by the industry, both direct and indirect, is also impressive in each of these countries (Nantha and Tisdell, 2009). It cannot be expected that the large international corporations that grow and process oil palm and the governments of Malaysia and Indonesia will quietly accept the return per hectare quoted by Grieg-Gran (2006: 11) of $1700 per hectare, per year, as adequate compensation.

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Taking such factors into account suggests that the scale and complexity of the compensation packages that would be needed to avert the expansion of oil palm is far greater than has been suggested by the Grieg-Gran (2006) study. This estimate of opportunity costs of tropical agriculture is also highly dependent on the assumption that there will be zero displacement of deforestation to other areas. In the face of increasing needs for local food supplies and increasing global demands for their products, as manifest in increasing product prices, the notion that the availability of compensation will bring to an end the need for rural communities in developing tropical countries to cease clearing, also needs to be seriously challenged. Any reduction in the production of export crops could tend to increase global food prices. The returns to agriculture have recently been influenced by a rising demand for palm oil linked to the demand for biofuels. Tacconi (2007a) commented that the returns to palm oil in Indonesia, accounting for some 30 percent of deforestation, were double those in the Grieg-Gran study. The case of the rise in biofuels and the effects on international food prices provide an example in Chapter 6 of the negative social impacts of reducing the amount of arable land available for food crops. To the extent that leakage takes place in the form of increasing deforestation in the country concerned or elsewhere in the tropics, the effective level of carbon protection is lowered and the real price per tonne of emissions abated is increased. 8.5.4

Compensation for Not Clearing is Only Part of the Answer

The economic implications of avoiding deforestation are much broader than indicated by the simple calculation of the direct opportunity costs in terms of the value of agricultural production foregone, which is the methodology employed in most studies of the costs of deforestation avoided. The income generated by development that involves the extraction of timber followed by the building and operating of palm oil mills and operating oil palm estates has a multiplier effect. A proportion of income generated locally is spent locally. There are leakages in saving and spending outside the locality, but the income generated locally would still have a multiplier effect of two or three times. Likewise jobs are created locally which might not be available otherwise. Programs of compensation need not only to include a large number of economic entities, but also to provide production alternatives. The monitoring of these large numbers of agents to ensure that they honor their contracts will incur large transaction costs. As Karsenty et al. (2008) point out, even if there are incentives in the

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shape of carbon credits for the conservation of forests, there are still many external factors such as interest rates, currency exchange rates, relative agricultural prices, agricultural policies, and world demands for food and biofuels that will continue to influence forest cover. Moreover there will be political costs borne by governments in adopting conservation policies that create winners and losers (see Box 8.1). According to Butler and Laurance (2008) the main culprits in tropical forest destruction are now likely to be major corporations engaged in logging, farming, exotic tree plantations and oil and gas development, rather than rural farmers. If this is so, then opportunities as well as serious challenges for conservation interests open up; the targeting of trade groups and corporations that are sensitive to public opinion could be influential in determining the fate of tropical forests. 8.5.5

Impacts of Avoiding Deforestation on Local Communities

In the Grieg-Gran (2006) study of the cost of half tropical deforestation much of the agricultural activity to be compensated was the growing of food crops. Food crops tend to generate less income than oil palm and therefore require less compensation per hectare, making projects in foodcrop growing areas more attractive to the purchasers of forestry offsets. The reduction in the ability of communities to grow food crops may well have undesirable social consequences. Such a program needs to be evaluated from an ethical point of view since it could condemn poor communities to continued poverty and leave them vulnerable to food insecurity. Also noted by Karsenty et al. (2008) is the criticism of REDD by the NGO community that the state will increase its control over forests and may exclude community forestry in its bid to gain credits from the reduction in deforestation or forest degradation. 8.5.6

Secondary Benefits of Avoiding Deforestation

In the studies of carbon price and the carbon sequestration potential reviewed above, there was no estimate of the secondary benefits of avoiding deforestation or reforestation and afforestation, yet these are often substantial. Benefits are environmental, such as conservation of biodiversity and improved water quality, as well as social, such as improved fuel supplies. The estimation of the value of these non-market goods and services and their value for inclusion in market models is extremely difficult, if not impossible. This means that there is likely to be a continual underestimation of the total benefits of avoided deforestation. (The biodiversity implications of incentives for forestry are the focus of Chapter 4.)

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BOX 8.1 PAYMENTS FOR AVOIDING DEFORESTATION IN DEVELOPING COUNTRIES: THE CASE OF PAPUA NEW GUINEA Papua New Guinea (PNG), a country straddling the equator north of Australia, has massive carbon stores in its primary forests. Deforestation is at a rate of 139 000 hectares a year, mainly for smallholder subsistence crops but also for palm oil production. PNG also hosts a logging industry exploiting several large concessions. At the United Nations Framework Convention on Climate Change (UNFCCC) in Montreal in 2005, PNG, along with Costa Rica, spearheaded the reconsideration of the application of incentives to avoid deforestation in developing countries. The move was successful in that discussions have ensued in the UNFCCC on amending the Kyoto Protocol. Guaranteeing the permanent protection of primary forest in PNG will be hampered by weak governance and pervasive and strong customary land tenure. The question looms large whether the compensation to conserve carbon rather than grow crops would be equitably distributed and efficiently used. Landowners receive only a small proportion of the value of exported logs, the government retaining the larger share of the proceeds even though customary tenure of land, and by implication the ownership of the forest, is enshrined in the PNG constitution (Hunt, 2002). Investors in forestry offsets will need to be convinced that PNG is a profitable place in which to invest in carbon sequestration. Establishing project baselines for forest and carbon, and monitoring forest areas using remote sensing will be expensive. Carbon investment on any scale from the private sector seems unlikely unless the investor is also a donor, such as Australia, willing to bear the high risks. The irony is, however, that by the time any renewed Kyoto incentive scheme that compensates developing countries for avoiding deforestation becomes a reality, that is post-2012, PNG’s remaining commercially viable logging concessions are all likely to have been committed to logging. Post-2012, PNG may well have no areas of forest to bring to the table in which it can

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claim it is avoiding deforestation (Hunt, 2006). If the aim on the other hand is to reduce deforestation by smallholder cropping and oil palm estates then negative social and economic consequences could result that would need to be addressed. Unless the PNG state successfully transfers income from the sale of forestry offsets to local communities, agricultural activities and the clearing of forests are likely to continue. The case illustrates that governments of developed countries and investors need to be aware of the wider consequences of large-scale conservation of forests for their carbon value and the need to formulate integrated development proposals for the developing countries affected.

Figure 8.7

8.5.7

© 1989 Scott Willis, San Jose Mercury News

Prospects for Harnessing Private Sector Funds

While this book has supported market approaches to the inclusion of forestry in climate change policy, it has also pointed to the low level of support for forestry instruments in the global markets under the Kyoto Protocol. This section takes a closer look at whether such a market approach to REDD will attract private investment.

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To be credited, any REDD scheme must prevent deforestation or forest degradation that would have taken place without the scheme. This means that some or all of the instrumental actors – individuals, communities, commercial enterprises (both indigenous and multinational), institutions and government departments – must be persuaded with financial or other incentives to change their behavior. Under the market model the funds to compensate the actors for their loss of income, and to provide alternatives, are to come from the demand for forestry offsets from the private sector within countries with binding emission targets who wish to reduce their cost of compliance. Chapter 1 provides models of how forestry offsets in the case of reforestation and afforestation can be effective in reducing compliance costs. Implicit in most REDD schemes that have been proposed in workshops and elsewhere is the control of the processes by the developing country itself. This recognizes developing country sovereignty and is deemed essential for developing country participation. Schlamadinger et al. (2005: 56) offer specific advice on the form of credits and the responsibility for enhanced emissions. Investors cannot be held liable for the possible failure of measures introduced by governments: ‘It is a prerequisite that the host country assumes full liability for the carbon stocks, not only in the commitment period during which the credits are issued but also in future commitment periods, and for all lands that were monitored and accounted for at the outset’ (Schlamadinger et al., 2005: 56). This is already the approach used for Annex I countries under the Kyoto Protocol. Modifications could be made to accommodate countries with decentralized forest governance. The private sector, having invested in a project, will look to a return on its investment in the form of marketable credits issued by the developing country, certified by an international agency similar to the CDM Executive Board, or in the form of payments generated by the sale by governments of certified REDD credits. The developing country government would be in control of how it persuaded the actors within its borders to change their practices, soliciting international support from the private sector and funds for programs such as lifting agricultural productivity which would augment the cash incentives to agricultural producers. 8.5.7.1

Funding of REDD is indirect compared with funding for afforestation and reforestation under the CDM Unlike project development in the case of afforestation and deforestation where the investment is relatively direct, that is the process of establishing and monitoring tree plantations, the incentive packages under a REDD

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scheme would need to be multifaceted, taking account of the idiosyncratic proximate and indirect drivers of the deforestation and degradation which is to be halted. The returns from the sale of REDD credits would need not only to contribute substantially to the opportunity costs to producers, but also to the costs of government agencies to promote the scheme’s training programs for communities in alternative agricultural practices and in forest stewardship. The costs of ongoing monitoring of the forest, including the prevention of illegal logging of the forest, now forming part of the forest carbon inventory of the developed country, would also need to be covered by sales of credits. Where logging is to be terminated the incentive payments may need to be made not only to the landowner and government recipients of logging proceeds but also to the multinational logging companies whose activities and profits are reduced (Hunt, 2002). Likewise, in the prevention of deforestation by avoiding the establishment of plantations or smallholder oil palm there may be demands not only from farmers and oil palm mills for compensation but also to the myriad businesses that service the oil palm industry who also forgo income. The multiplier effect of logging and oil palm and other agricultural crops is completely ignored in most estimates of opportunity costs. Given the likely complexity of arrangements to compensate for reducing deforestation, REDD is unlikely to be cheap, or indeed quick, as claimed by Stern (2006). The returns from REDD credits would need to be sufficient to generate a margin over and above costs of compensation sufficient to make it profitable for the private sector to invest. However, the stringency of future binding targets on developed countries post-2012, which will determine the price of REDD credits, is unknown. The difficulty of linking funding with the result in terms of REDD credits generated, the issue of which is controlled by the government of the developing country, throws doubt on whether the private sector would have an incentive to invest specifically to acquire REDD credits. It is far more likely that the private sector’s role would be in the investment in projects that are tendered by governments as part of their REDD programs. As pointed out above, these will vary from the organization of simple compensation payments to landowners, to retraining activities, to preventing illegal logging. The funding of government and community efforts to clarify, assign and enforce property rights are also a precondition for effective REDD in many countries (Chomitz et al., 2007). The form of the credits generated by REDD needs to be established. Will credits generated be temporary, like those under the CDM and as advocated by Mollicone et al. (2007)? It is salutary to examine the very small contribution of A/R under the CDM, as illustrated in Chapters 2

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and 7. The small role of A/R is due partly to the absence of the US and the EU from the market for CERs and its late start, but it is also due to costs of mounting such projects, combined with the low prices for CERs forced down by their temporary nature, making investment in them unattractive to investors and leaving the World Bank as the largest investor. A developing country will be loath to invest in REDD if its returns on the sale of REDD credits are low, relative to costs, as a result of price discounting linked to their risk and temporary nature. The issues of accounting for REDD carbon, devising baselines, preventing leakage and guaranteeing permanence are all subject to work in progress. Yet these issues need to be resolved if a scheme is to be agreed upon by the countries subject to a cap plus the majority of forested developing countries. There is also a risk that, if certified REDD credits did flow in sufficient volume to make a measurable difference to the rate of deforestation and forest degradation, they would undermine the price of emissions allowances by capped countries and thus undermine the rewards of adopting other types of non-forestry carbon-saving initiatives. On the other hand, there is no guarantee that the cuts and the consequent price of offsets will be high enough to provide a stimulus to tropical developing countries and, indirectly, the private sector to invest in REDD. The price of REDD offsets will be dependent on the price of emissions allowances, and this in turn will be determined by the deepness of the cuts in emissions by capped countries, as already emphasized, but this is yet unknown. Given the multiple difficulties and risks of proceeding with a mechanism linked to demand by capped countries for REDD offsets, a conclusion is drawn that the direct funding of REDD by international agencies and governments is a much more certain route, at least in the near future. 8.5.7.2 Funding of REDD and co-benefits The World Bank’s BioCarbon Fund has pioneered afforestation and reforestation activities under the CDM of the Kyoto Protocol. The BioCarbon Fund funded the Pearl River Basin project in China, the first CDM project to be registered, and reviewed in Chapter 2. A second fund of the World Bank, the Forest Carbon Partnership Facility (FCPF), is aimed at REDD by applying value to the carbon in standing forestry. The FCPF has two parts, the Readiness Mechanism and the Carbon Finance Mechanism. The former assists 20 tropical and subtropical countries in voluntarily readying themselves for future REDD. Strategies are prepared and emissions monitored from deforestation and degradation. The Carbon Finance Mechanism will subsequently select a few countries for the pilot phase which will make incentive payments for independently verified emission reductions by REDD. A variety of approaches will

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be considered for financing and testing, for example, macro policy and legal reforms in forest conservation and management, land-use policies, payments for environmental services, establishment of parks and intensification of agriculture. The target size for the Readiness Mechanism is US$100 million and for the Carbon Finance Mechanism US$200, the sources being both private and government. It is intended that much larger financial flows will be made possible over the medium term through the knowledge and experience developed in the pilot phase (World Bank, 2008). A major problem associated with payments for sequestered carbon is that there are no matching payments available for the conservation of biodiversity or environmental services (Hunt, 2008; Miles and Kapos, 2008). Where payment for forestry offsets is stimulating afforestation and deforestation, monocultures are the likely result, as opposed to mixed species plantings that have greater ecological value. Likewise, in the case of market-based REDD, the carbon investment will be likely to be directed to projects where the cost of carbon conserved is least. This asymmetry in funding between carbon and ecosystems means that there is no guarantee that REDD will make a critical difference to the preservation of tropical forest habitat vital to threatened or endangered ecosystems or species. Under a funds-based approach an integration of carbon and ecosystem investment priorities could more easily be achieved through funds such as the FCPF and the BioCarbon Fund. Projects could be prioritized by the level of carbon preserved in tropical forests together with the level of ecosystem co-benefits that would be achieved.

8.6

CONCLUSIONS AND RECOMMENDATIONS ON REDD

In reviewing key proposals that are on the table for reducing deforestation and forest degradation (REDD) in developing countries, some issues emerged that are bound to affect the inclusion of REDD in a market mechanism. A market mechanism in this context is one where the emission-capped nations offset their emissions and thus lower their costs of compliance by purchasing REDD credits from developing countries. The underlying and most fundamental issue is whether a tonne of CO2e prevented from entering the atmosphere as a result of REDD is equivalent to a tonne of CO2e abated through other measures. Because the protection of a forest is easily reversible in the future, REDD credits may be deemed temporary. If so, then a REDD carbon credit cannot be traded in global markets on the same footing as other units such as Assigned Amount

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Units, the allocation of which reduces emissions permanently. We already see difficulties of permanence in the CDM where forestry credits are not deemed equivalent to, and are therefore discounted heavily compared with, other Kyoto units. If the price of REDD units is low then the incentive to earn them by developing countries will also be low and the potential for REDD will be stalled. Other doubts on the credibility of the quantification of emissions avoided through REDD are thrown up by the following queries: ● ●

●

whether the reduction in a developing country’s emissions by REDD would have happened anyway; whether leakage internationally is being fully accounted for given that not all nations are expected to enter a voluntary scheme for REDD; whether degradation is being fully accounted for.

Operational difficulties extend to the method of rewarding countries that have reduced their deforestation below their baseline or target. The total global reduction in emissions from REDD may be compromised by some countries failing to meet their targets. This would mean a discounted distribution of REDD credits to countries that had made progress. But the introduction of penalties for exceeding targeted levels of emissions would have the undesirable consequence of deterring countries from entering the REDD scheme. Moreover, it seems unavoidable that national targets negotiated will be based on political compromises and as such may tend to undermine the veracity of the REDD achieved and consequently the value of credits in a market. A further operational limitation that applies to a market-based mechanism, where nations subject to a cap on their emissions invest in the delivery of REDD offsets, is the indirect nature of the investments that need to be made. To make progress, policies and institutions need to change, pervasive illegal logging needs to be stopped, large multinationals need to be somehow mollified, and agricultural communities need to be convinced that abandoning agricultural development and replacing it with stewardship of the forest will benefit them socially and economically. The poor state of governance in many of the countries responsible for most of the emissions from deforestation and forest degradation increases the risk to investors who will be concerned whether the funds advanced against future REDD credits will in fact reach their targets. Guarding against risks of failure of projects is another factor that, together with its other political, economic and socioeconomic complexities, could make REDD much more expensive than has hitherto been suggested by

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prominent researchers and commentators. To tackle poor law enforcement and corruption, action will be required not just by governments initiating REDD programs but by concerted efforts by industries, the general public and forest communities within countries as well as consumer groups outside them. The funds-based approach is preferred notwithstanding the emphasis given a market approach to REDD in the Waxman-Markey Bill, H.R.: 2454: American Clean Energy and Security Act of 2009. In the near term, REDD should augment the reduction of emissions from the burning of fossil fuels, rather than offer a way of offsetting and reducing the cost of such reductions. There is urgency in the need to reduce the rate of deforestation both from a climate change and a biodiversity conservation perspective. Existing programs can be stepped up immediately, thus supplementing the development of a post-Kyoto agreement that sets global and national targets for the reduction of greenhouse gas emissions. The funds-based approach also shows promise in being able to expeditiously couple the funding of biodiversity conservation and socioeconomic goals with that of carbon sink protection. If a market-based REDD scheme does emerge, the funds-based approach will have contributed much to its development.

REFERENCES Achard, F., H. Eva, P. Mayaux, H. Stibig and A. Belward (2004), ‘Improved estimates of net carbon emissions from land cover change in the tropics for the 1990s’, Global Biochemical Cycles, 18. AFP (Agence France-Presse) (2008), ‘Indonesia overtakes Malaysia as top oil palm producer: minister’, 14 April, available at http://www.spacedaily.com/reports/ Indonesia_overtakes_Malaysia_as_top_palm_oil_producer_minister_999.html. Asner, G., D. Knapp, E. Broadbent, P. Oliveiri, M. Keller and J. Silva (2005), ‘Selective logging in the Brazilian Amazon’, Science, 310, 480–82. Barbier, E., R. Damania and D. Leonard (2005), ‘Corruption, trade and resource conversion’, Journal of Environmental Economics and Management, 50(2), 276–99. Beaumont, K., T. Herzog and J. Pershing (2005), Navigating the Numbers: Greenhouse Gas Data and International Climate Policy, Washington, DC: WRI. Benítez, P., I. McCallum, M. Obsersteiner and Y. Yamagata (2007), ‘Global potential for carbon sequestration: geographical distribution, country risk and policy implications’, Ecological Economics, 60, 572–83. Boscolo, M. and M. Vargas Rios (2007), ‘Forest law enforcement and rural livelihoods in Bolivia’, in L. Tacconi (ed.), Illegal Logging: Law Enforcement, Livelihoods and the Timber Trade, London and Sterling, VA: Earthscan, pp. 139–66. Butler, R. and W. Laurance (2008), ‘New strategies for conserving tropical forests’, Trends in Ecology and Evolution, 23(9), 469–72.

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Casson, A. and K. Obidinski (2007), ‘From the new order to regional autonomy: shifting dynamics of illegal logging in Kalimantan, Indonesia’, in L. Tacconi (ed.), Illegal Logging: Law Enforcement, Livelihoods and the Timber Trade, London and Sterling, VA: Earthscan, pp. 43–68. Chomitz, K., P. Buys, G. De Luca, T. Thomas and S. Wertz-Kanounnikoff (2007), At Loggerheads? Agricultural Expansion, Poverty Reduction and Environment in the Tropical Forests, Washington, DC: World Bank. Curran, L., S. Trigg, A. McDonald, D. Astaini, M. Hardiono, P. Siregar, I. Caniago and E. Kasische (2004), ‘Lowland forest loss in protected areas of Indonesian Borneo’, Science, 303, 1000–1003. DeFries, R., F. Achard, S. Brown, M. Herold, D. Murdiyarso, B. Schlamadinger and B. deSouza (2007), ‘Reducing greenhouse gas emissions from deforestation in developing countries: considerations for monitoring and measuring’, Environmental Science and Policy, 10, 385–94. Ebeling, J. and M. Yasué (2008), ‘Generating carbon finance through avoided deforestation and its potential to create climatic, conservation and human development benefits’, Philosophical Transactions of the Royal Society, 363, 1917–24. The Economist (1998), ‘Stumped by trees’, 19 March. Gibbs, H., S. Brown, J. Niles and J. Foley (2007), ‘Monitoring and estimating tropical forest carbon stocks: making REDD a reality’, Environmental Research Letters, 2, 14 pp, available at stacks.iop.org/ERL/2/045023. Grieg-Gran, M. (2006), ‘The cost of avoiding deforestation’, report prepared for the Stern Review of the economics of climate change, London: International Institute for Environment and Development. Houghton, R. (2005), ‘Aboveground forest biomass and the global carbon balance’, Global Change Biology, 11, 945–58. Hunt C. (ed.) (2002), Production, Privatization and Preservation in Papua New Guinea Forestry, Instruments for Sustainable Private Sector Forestry Series, London: International Institute for Environment and Development. Hunt, C. (2006), ‘An economic assessment of present and alternative arrangements for the management of PNG forests’, available at www.economy-environment. com. Hunt, C. (2008), ‘Economic and ecological implications of credits for biosequestered carbon on private land in tropical Australia’, Ecological Economics, 66, 309–18. Instituto Nacional de Pesquisas Espaciais (2005), ‘Monitoramento da floresta Amazônica Brasiliera por satelite’, Projeto PRODES, available at http://www. obt.inpe.br/prodes/index.html. ITTO (International Tropical Timber Organisation) (2006), ‘Status of tropical forest management 2005’, Yokohama: ITTO. Jung, M. (2005), ‘The role of forestry projects in the clean development mechanism’, Environmental Science and Policy, 8, 87–104. Karousakis, K. (2007), ‘Incentives to reduce GHG emissions from deforestation: lessons learned from Costa Rica and Mexico’, France: OECD, Paris. Karousakis, K. and J. Corfee-Morlot (2007), ‘Financing mechanisms to reduce emissions from deforestation: issues in design and implementation’, France: OECD, Paris. Karsenty, A., S. Guéneau, D. Capistrano, B. Singer and J-L. Peyron (2008), ‘Summary of the proceedings of the international workshop: “The international

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regime, avoided deforestation and the evolution of public and private policies towards forest in developing countries”, Paris, 21–23 November, 2007’, International Forestry Review, 10(3), 424–8. Kinderman, A., M. Obersteiner, B. Sohngen, J. Sathaye, K. Andrasko, E. Rametsteiner, B. Schlamadinger, S. Wunder and R. Beach (2008), ‘Global cost estimates of reducing carbon emissions through avoided deforestation’, Proceedings of the National Academy of Sciences, 105, 10302–307. Lambin, E. and H. Geist (2003), ‘Regional differences in tropical deforestation’, Environment, 45, 22–36. Laurance, W. (1998), ‘A crisis in the making: responses of Amazonian forests to land use and climate change’, Trends in Ecological Evolution, 13, 411–15. McCarthy, J. (2007), ‘Turning in circles: district governance, illegal logging and environmental decline in Sumatra, Indonesia’, in L. Tacconi (ed.), Illegal Logging: Law Enforcement, Livelihoods and the Timber Trade, London and Sterling, VA: Earthscan, pp. 68–90. Miles, L. and V. Kapos (2008), ‘Reducing greenhouse gas emissions form deforestation and forest degradation: global land use implications’, Science, 320, 1454–5. Mollicone, D., F. Achard, S. Federici, D. Eva, G. Grassi, A. Belward, F. Raes, G. Seufert, H-G. Stibig, G. Matteucci and E-D. Schulz (2007), ‘An incentive mechanism for reducing emissions from conversion of intact and non-intact forests’, Climatic Change, 83, 477–93. Nantha, H. and C. Tisdell (2009), ‘The orangutan–oil palm conflict; economic constraints and opportunities for conservation’, Biodiversity and Conservation, 18(2), 487–502. Norton-Griffiths, M. and C. Southey (1995), ‘The opportunity cost of biodiversity conservation in Kenya’, Ecological Economics, 12(2), 125–39. Olander, L., H. Gibbs, M. Steininger, J. Swenson and B. Murray (2008), ‘Reference scenarios for deforestation and forest degradation in support of REDD: a review of data and methods’, Environmental Research Letters, 3(2), 2–11. Rijksen, H. and E. Meijaard (1999), Our Vanishing Relative: the Status of Wild Orangutans at the Close of the Twentieth Century, Dordrecht: Kluwer. Santilli, M., P. Moutinho, S. Schwartzman, D. Nepstad, L. Curran and C. Nobre (2005), ‘Tropical deforestation and the Kyoto Protocol’, Climatic Change, 71, 267–76. Schlamadinger, B., L. Ciccarese, M. Dutschke, P. Fearnside, S. Brown and D. Murdiyarso (2005), ‘Should we include avoidance of deforestation in the international response to climate change?’, in D. Murdiyarso and H. Herawati (eds), Carbon Forestry, Who Will Benefit?, Proceedings of the workshop on carbon sequestration and sustainable livelihoods, 16–17 February, Bogor, Indonesia: CIFOR. Skutsch, M., N. Bird, E. Trines, M. Dutschke, P. Frumhoff, B. de Jong, P. van Laake, O. Masera and D. Murdiyarso (2007), ‘Clearing the way for reducing emissions from tropical deforestation’, Environmental Science and Policy, 10, 322–34. Solomon, D., D. Qin, M. Manning, Z. Chen, M. Marqui, K. Averyt, M. Tignor and H. Miller (eds) (2007), Climate Change 2007: The Physical Science Basis, Contribution of Working Group 1 to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge, UK and New York, NY: Cambridge University Press.

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Notes 1. Nordhaus is conservative in using a 4 percent discount rate in calculating damages and suggests a tax of US$9.30 per tonne of CO2e in 2010 (Nordhaus, 2007: 62). Nordhaus criticizes the strategies for tackling climate change proposed by Stern (2006) and Gore (2007), calculating that they will require taxes in the order of US$150 to US$250 per unit of emission, a level of taxation that would, he suggests, incur large economic costs (Nordhaus, 2007: 63). 2. Kyoto units, all equal to one tonne of CO2e, include assigned amount units (AAUs) allowances issued by Annex I countries against their national registries; removal units (RMUs) derived from removals by sinks, including forestry; emission reduction units (ERUs) issued under Joint Implementation project activities and converted from AAUs or RMUs and certified emission reduction units (CERs) sequestered or abated under the Clean Development Mechanism (CDM) (UNEP Risoe, 2008). 3. To maintain consistency throughout the book definitions used to describe plantation forestry are those that were adopted by the UNFCCC at a meeting of the parties to the Protocol (UNFCCC, 2006a: 5), defining the allowable activities in the first commitment period (2008–2012) as follows: ●

●

Afforestation (A): The direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources. Reforestation (R): The direct human-induced conversion of non-forested land to forested land through planting, seeding and/or the humaninduced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the first commitment period reforestation activities will be limited to reforestation occurring on those lands that did not contain forests on 31 December 1989.

4.

In the case of forest management, under Article 3.4, there is a cap of 15 percent on projected removals or 3 percent of base year emissions, whichever is less, on the amount that can be credited by a country in the first commitment period. Forest management removals are accounted for in the year that they occur rather than against a baseline of 1990. This cap and the accounting method ameliorate the problem that forests can deliver windfall gains from natural effects or actions taken before 1990 and these could enter the accounting system (Schlamadinger et al., 2007a). Forest management largely through reforesting after harvested, is expected to be a major source of carbon credits in the US. 5. As discussed in Chapter 7, A/R costs are higher in the EU than elsewhere and this would have contributed to the EU’s lack of support for the inclusion of LULUCF in the Kyoto Protocol. 218

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6. In Chapter 5 it is emphasized that estimates of CO2e removal rates by forests should be based on local data or growth models that reflect the slow growth rate of trees in the years immediately following establishment. 7. The danger of CDM projects crowding out the potential for developing countries to take initiatives themselves is highlighted by Wara (2007). 8. The questions of permanence of plantation forests, together with the difficulty of measuring the additional carbon sequestered and accounting for it, delayed the inclusion of afforestation and reforestation under the Kyoto Protocol until 2005. However, in contrast to the active voluntary market, no A/R projects had reached a stage at the end of 2008 where units of emission reductions, CERs (which are equal to 1 tonne of CO2e removed from the atmosphere), had been issued and could enter the market. The lengthy gestation of the development of the protocols for A/R, which came into force only in 2005, the complexity of methodologies and the long length of the CDM approvals pipeline, are causes. There are 10 approved A/R projects in the CDM pipeline that have the potential to generate 0.495 Mt of offsets (in the form of CERs) a year (UNEP Risoe, 2008). But this is still a small amount, compared with A/R in the voluntary market, which generated 6.5 Mt in 2007 (Hamilton et al., 2008: Table 2; Figure 12). 9. Other climate models with different profiles for the MSC of carbon to the one investigated will generate different results. Earlier studies by Fearnside et al. (2000) and Moura-Costa and Wilson (2000) accounted for CO2 removals by forestry against the fraction of CO2 emissions that remain in the atmosphere for 100 years after emission, as described by Houghton et al. (1994), where the decay pattern is a surrogate for marginal social costs inflicted by CO2 emissions. The shape of this decay curve for CO2 means that higher costs are generated in the early years than in the model of damage costs used, based on Nordhaus (1994), in which the damage costs are low initially but build over time as shown in Figure 3.5. 10. The term afforestation used by the CCX includes reforestation. 11. The global warming potential of greenhouse gases is expressed in terms of their carbon dioxide equivalent (CO2e), the commodity traded in global carbon markets (IPCC, 2007: Table 2.14). 12. The December 2007 UNFCCC Bali Climate Change Conference accepted the need for incentives for conserving tropical forests given that their destruction contributes some 17 percent of greenhouse emissions. However, a scheme that rewards avoidance of deforestation and degradation, and that would conserve both carbon sinks and biodiversity, has not yet been negotiated by parties to the Kyoto Protocol and in any case could not come into effect until 2013 after the Protocol’s first commitment period expires. 13. The Greenhouse Gas Protocol of the World Resources Institute is a scheme that includes forestry but it is confined to standards for meeting regulatory carbon targets or validating the carbon in voluntary offset schemes (World Resources Institute, 2008). 14. Catterall and Harrison (2006) provide a synopsis of reforestation activities in north Queensland. 15. Inclusion of the height of trees in allometry can improve precision. However, the measurement of height can be very time consuming and in any case it is extremely difficult, often impossible, to see the tops of trees in a rainforest. Basing equations on tree diameter alone is thus more useful (Brown, 2002).

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16. The general procedures adopted for reforestation are to kill all weeds and grass before planting and fertilizing 3250 seedlings per hectare and following up with weed maintenance over a three- or four-year period. See Hunt (2008) for more details of the practices and costs in establishment and maintenance of mixed rainforest species in the study area. 17. The price for carbon offsets in Australia has ranged between US$7.00 and US$13.00 per tonne of CO2e (Hunt, 2008). Prices by developers internationally tend to be lower, at around US$6.00 (Hamilton et al., 2008). 18. The value is ‘notional’ in that it will never be realized. While the rainforest that was measured is on private land, it is protected by a covenant and the owner could therefore not claim compensation for not clearing the land under a REDD policy. Much of the rainforest in the region is also protected under Queensland state and Australian government legislation. The clearing that does take place is of so-called regrowth that, however, can be anything up to 60 years old. 19. In the north Queensland situation it was found that it is more profitable from a carbon market perspective for private landowners to grow monocultures rather than mixed native species; and it is more profitable to grow monocultures purely for their carbon content, rather than for harvest, at current prices for timber. The biodiversity value of monocultures is much less than environmental plantings and is thus an issue in the study area where restoration of habitat is an ecological imperative (Hunt, 2008). Under Australia’s carbon pollution reduction scheme the credits for carbon dioxide removals by harvested plantations are subject to a permit limit based on the average carbon sequestered (Australian Government, 2008), rather than on an annual credit–debit basis used in this example to compare harvested and unharvested plantations. 20. Biogasoline includes bioethanol (ethanol produced from biomass and/or the biodegradable fraction of waste), biomethanol (methanol produced from biomass and/or the biodegradable fraction of waste), bioETBE (ethyl-tertiobutyl-ether produced on the basis of bioethanol; the percentage by volume of bioETBE that is calculated as biofuel is 47 percent), and bioMTBE (methyltertio-butyl-ether produced on the basis of biomethanol: the percentage by volume of bioMTBE that is calculated as biofuel is 36 percent). Biodiesels include biodiesel (a methyl-ester produced from vegetable or animal oil, of diesel quality), biodimethylether (dimethylether produced from biomass), Fischer Tropsh (Fischer Tropsh produced from biomass), cold pressed bio-oil (oil produced from oil seed through mechanical processing only) and all other liquid biofuels which are added to, blended with or used straight as transport diesel. Other liquid biofuels include liquid biofuels not reported in either biogasoline or biodiesels (Energy Information Administration, 2007). 21. The GHG saving depends largely on the fuel source of the ethanol plant (Wang et al., 2007). 22. The trade in emissions allowances and in credits generated by land-use change and forestry both internationally and within countries is in terms of tonnes of CO2 equivalent (CO2e), the main GHGs being converted to CO2e according to their global warming potential. 23. Some countries such as Australia were allowed to increase their emissions, while others such as the United Kingdom accepted caps greater than 5

Notes

24.

25. 26. 27.

28. 29.

30.

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percent, as set out in Annex B of the Kyoto Protocol (United Nations, 1998). The Western Climate Initiative is by US states California, Montana, New Mexico, Oregon, Utah and Washington and by Canadian provinces British Columbia, Manitoba, Ontario and Quebec (Western Climate Initiative, 2008). The Regional Greenhouse Gas Initiative is by the 10 US states Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont (Regional Greenhouse Gas Initiative, 2008). Here, ‘afforestation’ includes ‘reforestation’. In Australia the term ‘reforestation’ is used rather than ‘afforestation’ because most lands were forested in the recent past. In the Australian scheme RMUs will be accepted, as will non-forestry CERs, and ERUs created under JI in the first commitment period, but Australia will not host JI projects. Assigned amount units (AAUs) will not be accepted in the first commitment period nor will temporary certified reduction units (tCERs) and long-term certified reduction units (lCERs) generated by afforestation/reforestation projects under the CDM. That is, there would be no opportunity for the Australian government or entities covered by the scheme to purchase AAUs from other countries, or tCERs and lCERs, to reduce the costs of making cuts in emissions. A commitment period is the discrete accounting period for reduction in GHG emissions agreed in UNFCCC negotiations. At the second UNFCCC (2007) workshop on reducing emissions from deforestation in developing countries there was also disquiet over the inclusion of reduced emissions through afforestation and reforestation given that this is covered by the CDM. Regarding approaches of rewarding countries with lower deforestation rates than the global baseline, views were expressed that positive incentives should be confined to actual reductions in national emissions. Where CO2e is the expression of the global warming potential, in terms of CO2, of the major greenhouse gases.

Index accounting for emissions from degradation 194 additionality and establishing a baseline 128 additionality of carbon measured in forests 133 afforestation definition 104 in US cap and trade scheme 169 afforestation and biofuels in USEPA modeling 169 afforestation and deforestation New Zealand cap and trade scheme 176 afforestation defined 104 afforestation/reforestation (A/R) 69, 104, 114 bankability of credits 45 biodiversity loss 100 carbon sequestration by location 85 costs in the CDM 63 first commitment period 46 CO2e removal by 2012, potential 45 importance 45 importance in voluntary market 77 in CDM 41 in first commitment period 179 investment risk 182 proportion of projects in pipeline see CDM registration of projects under the CDM 45, 57 responses to payments 29 sale of carbon sequestered ex ante 92 social costs offset, not offset 88 Africa 25, 27, 45, 46, 50, 80, 92, 95, 97, 99, 182, 188, 190, 204 biofuels 154 agricultural commodity prices cap and trade in US 170

agricultural offsets in US cost of emission reductions 168 allometric equation carbon measurement in forests 126 Amazon 193, 194 deforestation and price of soybean 156 Amazon Basin deforestation 155 Amazonia 156 Annex B countries AAUs 166 cut in greenhouse gas emissions 33 Kyoto Protocol 33 Araucaria cunninghamii 85, 131, 136, 160 Asia 5, 25, 27, 45, 46, 73, 80, 92, 95, 97, 98, 99, 182, 188, 204 forestry offset projects 73, 75 source of biofuels 161 assigned amount units (AAUs) 12, 14, 16, 18, 34 asymmetry in funding biodiversity and carbon sequestration 212 atmosphere as unmanaged commons 33 atomic weight of carbon (C) 24 Australia avoided deforestation 114 biofuels program 158 cap and trade scheme 18, 118, 162 carbon accounting model 125 carbon capture and biodiversity 106 carbon pollution reduction scheme 112 cost of measurement of carbon in forests 136 demand for offsets 72 emission targets 175 emitter of greenhouse gases 167 forest area 96 forestry in climate change policy 61 forestry potential 167

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Carbon sinks and climate change

GHGs per person 167 government control of forests 29 government guide to forest sink planning 85 Greenhouse Challenge Program 82 Greenhouse Friendly Scheme 68, 76 importance of A/R 5 Kyoto Protocol 11, 91 Kyoto Protocol, LUCF arrangements 37 Kyoto target 37 LULUCF 35, 83 measuring the carbon in forests 122, 126 national carbon accounting toolbox 140 offset projects 73 offset providers 75, 94 offset retailers 74 reforestation 30, 45 targets and LULUCF 35 voluntary offsets market 176 avoided deforestation as a voluntary offset 81 Bali Action Plan 189 Bali climate change conference 123 avoided deforestation 92 REDD 81, 184 bankability of forestry CERs 180 baseline methodology, CDM 49 Berendt federal standards forestry 171 BioCarbon Fund 62 pioneer in A/R in CDM 211 biodiesel comparison with reduction in GHGs by plantations 161 nitrous oxide emissions 154 biodiesel feedstocks in US and Europe 145 biodiversity implications of A/R in Tanzania 111 biodiversity implications of forestry offsets in Annex I countries 104 biodiversity implications of innovative funding mechanisms for voluntary REDD schemes 115 biodiversity implications of US cap and trade scheme 169

biodiversity standards in voluntary forestry offset schemes 112 bioenergy crops, profitability 161 bioethanol 145 biofuels and land use 161 carbon debts, Brazil 156 commercialization of new technology 148 cost per tonne of CO2e emissions avoided 154 deficit, US 151 deforestation in the Amazon Basin 155 economic cost 157 food prices 151 from forest residues 158, 161 from peat lands, Indonesia and Malaysia 156 from wood 154 indirect impacts on GHGs 153 land area devoted to 152 land as limiting factor 154 life-cycle analysis of GHGs 153 limits to land 150 perverse incentives 157 plantations and competition for land 158 policy 161 prices of corn and soybean, US 155 research 150 Quebec 157 savings in GHGs, direct and indirect 153 biofuels subsidies indirect effects 155 ‘knock on’ effect 155 price of corn and soybean 155 US and EU 153 biologically diverse regions 97 Bolivia 192 tropical forest 204 Borneo 197 Boston University xi bottom-up studies of forestry potential 169 Brazil 5, 44, 96, 98, 99, 147, 201, 202 biofuel crops 156 biofuels 148 biofuels and carbon debts 156

Index costs of ethanol production 153 sugarcane for ethanol 145 sugarcane production forecast 161 source of biofuels 161 tropical forest 204 Brazilian Amazon illegal logging 201 Brazilian ethanol GHG emissions 151 Britain, biofuels 157 Bush 146, 148, 150 buyers of afforestation and reforestation projects in the CDM 46 California cap and trade 105 Climate Action Registry 79, 114 forestry protocols 18 Cameroon tropical forest 204 CAMFor (see National Carbon Accounting System) 129, 134, 174 carbon measurement in forests 127 predicting carbon sequestration 129 Canada government control of forests 29 offset projects 73 offset retailers 74 permanence of forests 41 reforestation on private land 29 Canadian provinces cap and trade 167 Cangwa County 109 cap and trade 11 pricing of GHGs 163 cap and trade in-country 18 cap and trade schemes main mechanism for emission abatement 166 New Zealand 18 Western Climate Initiative 167 caps on greenhouse emissions 12–13 global 12 carbon accounting 134 Carbon Conservation Ltd 115 carbon credits commercialization in forestry 54 Ulu Masen avoided deforestation project 115

225

carbon dioxide equivalent (CO2e) 8, 67, 204 Carbon Finance Mechanism 211, 212 Forest Carbon Partnership Facility 116 pilot phase 211 carbon in trees 124 carbon measured and conversion to CO2e 130 carbon measurement in forest 125 carbon neutrality, forestry projects 86 carbon neutrality by purchasing offsets 71 Carbon Pollution Reduction Scheme forestry buffer 174 generations of permits by forestry 175 policy on forestry CERs 174 carbon sequestered additionality in plantations of rainforest species 133 by monoculture 86 harvested and unharvested plantation 132 carbon sequestration and biodiversity mutually exclusive or complementary? 107 carbon sequestration and biodiversity Australia 107 carbon sequestration rates 124 carbon sequestration, incremental nature 85 carbon sink/biodiversity protection coupled 214 carbon sinks biodiversity benefits 116 carbon, old growth forest 130 carbon-neutrality with offsets 70 Caribbean 97, 99 catastrophic climate change 170 ‘catch-22’, offset costs and food prices 170 CBD 100, 101, 102 CCX (see Chicago Climate Exchange) 15, 68, 73, 75 and REDD 84 buffer stocks 83 CO2e reduction schedule 75 crediting of carbon sequestered 74

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Carbon sinks and climate change

differentiation between native species and exotic monocultures 104 fungibility of forestry offsets 83 limits on offsets 77 permanence 84 sale of forestry credits 84 CDM 16, 38 and biodiversity 108 carbon measurement protocol 137 Executive Board 209 forestry case study, China 58 forestry contribution to CO2e removal 182 forestry in pipeline 76, 179 forestry policies post-Kyoto 178 future A/R arrangements 181 incentive for forestry 29 investors’ liability 198 policy analysis 180 projects financing of 179 registration of forestry projects 44 replacement of forestry CERs 51 road to 40 rules for forestry 44, 180 small-scale forestry projects 39, 58 sustainable development 39 temporary CERs 181 temporary nature of forests 178 cellulosic biomass sources in US and EU 161 cellulosic ethanol substitution for fossil fuels 145 lifecycle GHG emissions 158 cellulosic feedstock savings of GHGs 154 Central and South America 25 certainty equivalent discount rate forestry offset projects 87 certified emission reductions (CERs) Carbon Pollution Reduction Scheme 174 equal to 1 tonne CO2e 179 sale and purchase 39 sale of, Pearl River CDM project 110 sale of, Tanzanian CDM project 111 temporary under the CDM 196 Certified Emission Reductions under the CDM 47

characteristics of a federal cap and trade scheme 167 Chicago Climate Exchange (see CCX) 74 China 44, 96, 109, 184 afforestation 98 biodiversity 59 demand for forestry offsets 184 forestry, Kyoto Protocol 44 greenhouse gas emissions 169 watershed management in the Pearl River Basin 58 Clean Development Mechanism (see CDM) climate change policy New Zealand 176 Climate Change Registry forestry protocols 18 Climate Community & Biodiversity Alliance 112, 182 certification of forestry projects 92 climate policy and forestry in Australia and New Zealand 173 in the EU 171 in the US 167 Climate Wedge 75 Clinton Climate Initiative 125 Clouded Leopard 110, 115 CO2e (see carbon dioxide equivalent) equivalence of CO2e in sources 123 CO2e equivalence in REDD 212 Collins, corn-based ethanol 158 Colombia, expiry of carbon credits 41 commercialization of carbon credits in forestry 52 Commission of the European Communities avoiding deforestation 174 forestry plantations, EU 172 communities in tropical forests substitution of agriculture for biodiverse forest 100 confidence interval results of carbon measurement 126 Congress cap and trade 171 Conservation Reserve Program (CRP) 159

Index Convention on Biological Diversity 100, 116 lack of economic incentives 103 Convention on Migratory Species 101 Convention on the International Trade in Endangered Species of Flora and Fauna 101 conventional economic analysis and unpriced economic benefits 100 conversion of forests to agricultural land 97, 99 COP 9, tCERs, lCERs 41 Copenhagen climate change conference 4, 63, 161, 173, 189 corn ethanol substitution for fossil fuels 145 corn ethanol, US indirect GHG increase 156 corruption and REDD 200 cost not offset by ex ante forestry offsets 86 cost of compensation in REDD 204 cost of sequestered carbon native species versus monocultures 30 Costa Rica 193, 209 costs and funding of forestry in CDM 50 costs of carbon sequestration, US and Europe 172 costs of measurement of carbon in forests, Australia 136 cropland required for biofuels, EU 146 CRP lands, biofuels 161 DBH see diameter at breast height definitions, afforestation and reforestation 104 deforestation and demand for agricultural products 187 GHG emissions 187 incentives lack 123 incentives to reduce 189 measures to avert 161 underlying causes 190 deforestation and biofuels Amazon, Indonesia, Malaysia 156 deforestation and degradation causes 190

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deforestation forecast under business as usual 189 deforestation in tropical developing countries, GHGs 181 DEFRA 105 Democratic Republic of Congo 98, 99, 202 tropical forest 204 density of wood, carbon in trees 124 Department of Energy, biofuels 157 Designated National Authority, CDM 49 Designated Operating Entity, CDM 49 developing countries caps on emissions 177 exempt from caps on emissions 38 developing country sovereignty and REDD 209 diameter at breast height (DBH) carbon measurement in forests 126 discount rate marginal social costs 9, 54, 55, 85 displacement of deforestation and REDD 205 drivers of biodiversity loss human population and consumption increase 101 drivers of deforestation proximate and direct 99 dry matter estimation measuring carbon in forests 124 Eastern Europe, Kyoto Protocol 44 economic growth 99 economics of ethanol from wood 160 EcoSecurities, buying CERs 46 ecosystem loss 100 ecosystems and ecosystem services 99 emission allowances and offsets 122 trade in 20 Emission Reduction Purchase Agreement, CDM 49 emission taxes 8 emissions from non-Annex I countries 178 estimation of carbon sequestered project level and in-country 124 estimation of carbon sequestered per hectare, reforestations 130

228

Carbon sinks and climate change

ethanol and biodiesel from wood GHG savings analysis 162 ethanol from logging residues 158 ethanol from wood 160 EU biofuels policy 144, 156 feedstocks for bioethanol 145 REDD policy 172 source of cellulosic biomass 161 subsidies for biofuels 148 tariffs on biofuels 149 Western Europe, JI funding 38 wood for biofuels 159 EU Emission Trading Scheme (EU ETS) 5, 61, 167 allocation of allowances 17 forestry offsets 105 forestry plantations 172 EUROPA 61, 172, 173 Europe, wood for energy 158 European Parliament biofuels from sustainable sources 157 Executive Board of CDM 46, 48, 49, 58, 67, 76, 109, 137 expansion of agriculture indirect drivers 99 extensification of agriculture 99 failed states and REDD 200 FAO 95, 96, 97, 98, 99, 102, 123, 138, 204 Fauna & Flora International 115 financial risks in CDM forest project development 55 financial viability, offset projects 109 first commitment period, 2008–2012 see Kyoto Protocol first generation biofuels 145 flexibility mechanisms, cap and trade 166 food prices biofuels 153 cap and trade 170 forecasting carbon sequestration in commercial plantations 131 forest and land ownership, developing countries 190 forest carbon 3, 4, 74, 81

Forest Carbon Partnership Facility 116, 211 funding 116 forest management carbon sequestration 168 in US cap and trade scheme 169 forest plantations effectiveness in GHG reduction, compared with biofuels 161 forest plantations global 98 harvesting forest plantation and carbon sequestration 87 forest sector emission allowances generated 167 offsets generated 167 forest sinks on private land in US and price of CO2e 169 forestry and cuts in emissions 183 in models of abatement 28, 27 limited role in mitigating climate change 31 forestry CERs intrinsic value of 180 issue of in CDM 112, 179 replacement in CDM 179 Forestry Commission Scotland 105 forestry for carbon capture and biodiversity in Australia 106 forestry in cap and trade in Australia 173 forestry in complying with targets 34 forestry in the Kyoto Protocol 33 post-Kyoto role 184 potential by 2012 44 potential role 166 forestry in US cap and trade design features 171 forestry offset projects benefits in developing countries 182 ex ante accounting 82 forestry offset schemes guarantees of permanence 82 forestry offset schemes and biodiversity in the US 104 forestry offsets 4, 15, 22, 75, 91, 93, 105 achieving cost neutrality 87 demand: design features and biodiversity 92, 104 hidden costs of 89

Index permanence 82 transparency 91 verification 182 forestry offsets and biodiversity in the UK 105 forestry offsets in global markets 22 forestry offsets in US cost of emission reductions 168 forestry offsets, issues of permanence and timing 81 forestry project cycle under the CDM 46 forestry projects in the CDM pipeline 45 forestry sinks in the Kyoto Protocol timing and impacts 177 forestry’s potential in the US 26 forests for cellulosic ethanol 161 forests in the provision of biofuels 159 France, biofuels 158 fuelwood 58 funding of REDD 209 and co-benefits 211 funds-based REDD 212, 214 future of the CDM 181 Garnaut, greenhouse policy, Australia 173 General Agreement on Tariffs and Trade 101 Germany, biofuels 157 Ghana, tropical forest 204 GHG cuts, role of forestry offsets 29 GHG emissions, biofuels 171 GHG Protocol,World Resources Institute 138 GHG savings by displacement of petroleum fuels by biofuels 160 global financial crisis 26, 171 global markets for carbon and the Kyoto Protocol 38 global models, indirect effects on landuse change 171 global scenarios in biofuels production 161 globalization and deforestation 190 globalization, biofuels and GHGs 154 Gold Standard 79 governance and deforestation 202 governance and REDD 200

229

governance, failed states and corruption 200 Government of Aceh Ulu Masen avoided deforestation project 115 Great Britain 12 greenhouse gas abatement by biofuels 153 greenhouse gas pricing alternative energy sources 163 Greenhouse Gas Reduction Scheme of New South Wales forestry offsets 18 greenhouse gases, global warming potential 33 Grieg-Gran, costs of compensating for tropical deforestation 204 gross–net accounting 35 growing new forests for biofuels 160 Guangxi watershed reforestation 109 Guangxi Zhuang Autonomous Region 58 Höhne 40, 177 Huanjiang County 109 hybrid poplar for biofuels 161 illegal logging 201 impacts of avoiding deforestation on local communities 206 incentives, lack of for forest conservation 100 incremental annual value of carbon, plantations 130 India 96, 184 demand for forestry offsets 184 indirect effects of US cap and trade scheme 170 indirect GHG impacts of biofuels policies 156 Indonesia 96, 98, 99, 156, 190, 202, 204, 205 illegal logging 202 institutional change and REDD 213 institutional failure and loss of forests 101 international financial mechanism REDD 173 International Monetary Fund, tariffs on biofuels 163

230

Carbon sinks and climate change

International Tropical Timber Organization (ITTO) 203 International Union for the Conservation of Nature (IUCN) 98 investors in carbon sequestration 124 IPCC 25, 27, 28, 34, 40, 67, 125, 188, 195 ISO 1464, forestry offsets 84 Japan 12, 36 JI funding 38 Jensen DBH measurement in old growth tropical forest 129 identification of tree species in old growth tropical forest 129 JI (joint implementation) 38, 63 A/R projects in 181 Joint Research Centre 154, 159 Joint Research Commission biomass for biofuels 156 fossil fuels used in biomass production 156 Jung modeling the Kyoto options for forestry 41 role of LULUCF 44 Kalimantan 192, 198 illegal logging 202 Kazakhstan, Kyoto Protocol 33 Kyoto Protocol 4, 12, 16, 138, 298 adoption 33 agreement to cut emissions 166 bankability of projects 181 definition of forest 194 definitions of afforestation and reforestation 122 developed country offsets 167 estimation of emissions, sequestration 124 exclusion of deforestation in developing countries 38 forestry and first commitment period 45 forestry post-2012 166 future arrangements for forestry 61 future rules for LULUCF 62 greenhouse gases in Annex A 33

Höhne 40, 177 inclusion of sinks in 40 LULUCF 178 permanence of forestry projects 82 ratification 166 registration of forestry projects 44, 46, 58, 63, 76, 109, 211 rules for LULUCF 34 trade in AAUs 34 uncertainty at expiry, forestry CERs 57 US Congress 18 Kyoto Protocol, Annex B 8 Kyoto Units 39 landholder payments for conserving carbon 161 land-use change regulation to avert deforestation 161 land-use change in other countries US policy implications 171 land-use change, Brazil and south-east Asia biofuels policy 163 Latin America 25, 45, 46, 73, 80, 97, 99 leakage and REDD 205 leakage, forest sinks 39 Lieberman-Warner Climate Security Act of 2008, S. 2191 27, 169, 168 LINK 105 local communities economic benefits of forestry offsets 92 logging 190 long-term CERS (lCERs), in afforestation and reforestation 51, 53 with harvesting in A/R 55 loss of biodiversity and deforestation 95 LUCF, cap and trade schemes 166 LULUCF Australia and Kyoto Protocol 44 Canada and Kyoto Protocol 44 Japan and Kyoto Protocol 44 Kyoto Protocol 177 proponents historically 44 US and Kyoto Protocol 44

Index Mabi forest, Queensland, endangered ecosystem 106 Mabi forest reforestation 106 Malaysia 157, 190, 204 Malmsheimer ethanol from wood 159 managed forests Kyoto protocol 177 management and enforcement, protected forests 100 Maplpana 111 marginal opportunity costs of REDD 204 marginal social cost (MSC) CO2e emissions 9 emissions and markets 12 forestry offsets 86 market failure and biodiversity loss 100 markets for voluntary offsets 72 Marrakesh Accords 13, 15, 40, 41, 196, 197, 198 limits on CDM credits 178 McCarl, diversion of land from food crops to forestry, US cap and trade scheme 170 McKinsey forest sinks in US and the price of CO2e 168 forestry in global model of abatement 25 least-cost combination of abatement by sector 24 study of US abatement 26, 27 measurement protocols 137 measuring carbon in forests developments 124 measuring carbon in tropical forests in North Queensland 126 measuring the carbon in forest sinks 121, 123, 125, 127, 128, 130, 131, 132, 133, 134, 135, 136, 142 Merrill Lynch 115 methodologies for measuring deforestation 195 methodologies of carbon measurement 126 in the CDM 137 Millennium Ecosystem Assessment 97, 98, 99, 101

231

trade-offs, Millennium Development Goals and biodiversity loss targets 101 mixed rainforest species plantations, north Queensland 85, 126 modalities and procedures for forestry under the CDM 51 modeling of carbon sequestration rates 85 modeling the Kyoto options for forestry 41 models of carbon sequestration application in REDD 137 molecular weight of CO2 24 monitoring and reporting, standards and costs 172 monitoring of CDM projects 49 monitoring process in CDM, complexity 180 monoculture plantations, biodiversity loss 100 MSC (marginal social cost) of carbon emissions compared with C sequestration rate 86 definition of MSC 84 MSC of CO2e and market price 13 Mufindi 111 multiplier effect and palm oil 205 Mulun Reserve, China 110 Myanmar 202 Nabuurs, afforestation in the US 172 National Carbon Accounting System 125, 127 National Carbon Accounting Toolbox 129, 174 national carbon accounts 13 need for measurement of carbon in forests 122 Neeff, financial risks in forestry project development 55 net–net accounting 35, 191 Netherlands, biofuels 157 New South Wales clearing of native vegetation 37 Greenhouse Gas Reduction Scheme 11, 68, 78, 106, 136 New York Times 77, 157

232

Carbon sinks and climate change

New Zealand cap and trade 19, 167, 176 forestry in climate change policy 61 New Zealand Emissions Biodiversity Exchange 107 New Zealand’s ETS and biodiversity 106 non-Annex I tropical developing countries deforestation in 187 non-government organizations forestry offset policy, US 117 forestry policy in US cap and trade schemes 105 Nordhaus, price of carbon 27 North America, forestry offset projects 73, 75 Northern Ireland 12 Obama (see President Obama) 74, 169, 170 Oceania 97 OECD 161 agricultural commodity prices 161 offset claims 80 offset potential by forestry, top-down models 25 offsets, market sources 73 oil palm and deforestation 190, 192 old growth rainforest carbon measurement 126 variation in size of trees 129 opportunity cost conversion of land to forestry in US 168 REDD 203, 210 opportunity costs of afforestation/ reforestation 29 Orangutan 115 Oregon, forestry carbon offsets 105 palm oil and EU biofuels policy 156 palm oil exports, Indonesia and Malaysia 204 palm oil production for biofuels 156 OECD forecast 161 Panama afforestation versus cattle 29

Papua New Guinea 207, 208 logging concessions 207 REDD 187, 207 tropical forest 204 Paragominas 202 payments for carbon and ecosystem services 210 payments for CO2e removals 134 PDD (project design document, CDM) 47, 48, 49 Pearl River Basin, China CDM forestry project 58, 211 Perlack biofuels feedstock, US 146 ethanol production 158 feedstocks for biofuels, US 151 permanence of forests 82, 173 permanence of sequestered carbon 196 Peru 192 perverse incentives biodiversity loss 101 biofuels 157 photosynthesis, removal of atmospheric CO2 24 policies for biofuels, US and EU 161 policy for forestry offsets in voluntary markets 182 post-Kyoto agreement and REDD 214 post-Kyoto policies and rules for forestry in developed countries 176 post-Kyoto Protocol recommendation on forestry in CDM 184 REDD 181 Poznań climate change conference 172 pre-compliance market CDM 76 President Obama biofuels 157 cuts in greenhouse gases by 2050 167 price of dry biomass for biofuels 161 price of carbon in averting deforestation 161 price on emission allowances, cap and trade schemes 166 private sector and REDD 199, 208, 210 property rights and deforestation 190 proposals for REDD accounting 191 pyrolysis, biofuels 150

Index Queensland, clearing of native vegetation 37, 114 Wet Tropics Region of Queensland, Mabi forest 106 rainforest habitat 103 rainforests, species richness 98 Ramsar Convention on Wetlands 101 randomized plots, carbon measurement in forests 127 rate of forest loss 97, 98 Readiness Mechanism 211, 212 Forest Carbon Partnership Facility 116 REDD (reduction in deforestation and forest degradation) advantage over A/R 92 costs and benefits of conserving forests 203 credits 196 effectiveness in reducing emissions 189 emission cuts 211 equivalence with Kyoto units 213 Europe 173 financing 199 funds-based approach 183 inclusion in CDM 63 independent verification 211 international financial mechanism 173 leakage 197 market-based approaches 183, 198, 212 market impacts 172 marketable credits 64 national inventories 196 non-market funds 198 payments for, combined with conservation funding 198 payments to communities 203 physical measurement of carbon in tropical forests 138 pilot projects 92 price of credits 211 Readiness Mechanism 211 returns from the sale of credits 211 Stern, cost CO2e abatement, tropical countries 204

233

supplementary benefits 183 tackling poor governance and corruption 214 UNFCCC workshops 188 value in market 213 REDD and remote sensing 139 reducing deforestation in the tropical developing countries 184 reforestation 11, 16, 26, 29, 127 defined 104 subsidization, Australia 107 Regional Greenhouse Gas Initiative (RGGI) 17, 105, 168 allocation of allowances 17 forestry 18 registration under the CDM 76 removal of CO2e potential by forestry 2012 44 research on indirect impacts of LUC 183 root biomass 124 Russia, Kyoto Protocol 44 sampling error, carbon measurement in forests 126 Sathaye, afforestation in the US 172 Schlamadinger 34, 203, 209 School for Field Studies xi Scottish National Forest Estate 105 second generation biofuels advantages 145 biodiversity 161 cellulosic ethanol 149 commercialization and timing 160 costs 148 cut in emissions 154 land availability 161 production 159 supply of feedstock 148 secondary benefits of avoiding deforestation 206 sequestration of carbon over time 85 small-scale projects, CDM 58 Snowdon, allometry 126 social and economic consequences of REDD 208 social costs of carbon released to the atmosphere 84 social costs of increases in biofuel production 151

234

Carbon sinks and climate change

socioeconomics of REDD and the costs of avoiding deforestation 203 Sohngen, afforestation in Europe 172 South America 75, 92, 95, 182, 190 forestry offset projects 75 south-east Asia, biofuels and deforestation 156 soybean demand 99 species extinction 97 standards for offsets 91 stratification of reforestation plantations sampling procedure 126 Subsidiary Body for Scientific and Technological Advice 188 subsidies for biofuels IMF 163 social and climate impacts 171 US and EU 149 subsidies for emission reductions 10, 11 Sulawesi 192 Sumatra 192 Ulu Masen avoided deforestation project 115 Sumatran Elephant 115 Sumatran Tiger 115 switchgrass for biofuels 161 Switzerland, biofuels 157 Tanzania 109, 111, 202 tariffs on biofuels, US and EU 148, 153 temporary CERs (tCERs), in afforestation and reforestation 51, 52, 53 The Economist 78, 79 threatened and endangered species 92, 98 Tisdell viii–xi tonnes of carbon sequestered per hectare plantations and old growth plots 129 reforestation of mixed rainforest species 128 top-down models of forestry potential 169 trade in emission allowances cap and trade schemes 18 cost of compliance with emission cuts 167

transport biofuels 157 fuels from wood 158 lack of alternative fuels 163 limit to fuel efficiency gains 163 tree plantations for cellulose GHGs compared with crops 161 TreeFarms AS, Norway 111 Trees for the Evelyn and Atherton Tableland xi, 134 Ulu Masen forest ecosystem, Sumatra 115 UN Convention to Combat Desertification 101 UN Framework Convention on Climate Change 101 underlying factors in deforestation 190 UNEP 100, 101 UNEP Risoe 46, 47 UNEP Risoe, DOEs listed 49 UNFCCC 2, 12, 13, 15, 16, 33, 34, 40, 41, 45, 51, 58, 62, 81, 84, 104, 106, 109, 124, 125, 138, 179, 181, 188, 189, 194, 195, 197, 298, 207 see Bali climate change conference; Copenhagen climate change conference food production threats 171 REDD workshops 198 registration of forestry projects 109 United Kingdom demand for offsets 91 offset retailers 74 United Nations 2, 8, 12, 16, 33, 34, 35, 39, 94, 101, 104, 121, 124, 207 United Nations Framework Convention on Climate Change (see UNFCCC) United States Society for Ecological Economics xii University of Georgia 150 University of Massachusetts 150 US (United States of America) abatement opportunities study 26 abatement proposals to Congress 27 biofuels and rural communities 148 biofuels policy 144 biofuels production target 146 biomass from forests 159

Index cap and trade schemes 17, 166, 167 Chicago Climate Exchange see CCX contribution to mitigation by forestry 29 corn for ethanol 145 demand for credits from forestry projects in developing countries 63 emission caps 70 energy from biomass 158 Energy Independence and Security Act 146 Environmental Defense 113 forest potential 168 forestry in climate change policy 61 forestry offset demand 91 forestry offset schemes and biodiversity 117 forestry offsets 73 forestry potential 5 gasoline taxes 9 GHG savings, ethanol 153 government control of forests 29 greenhouse gas emissions 167 Kyoto Protocol 33, 44, 166 Kyoto Protocol modeling 42 land for wood 159 Lieberman-Warner Bill S. 2191 27 non-government organizations and biodiversity 105 not-for-profit tree planting organization 80 offset retailers 74 population and economic growth 26, 167 reducing US greenhouse gas emissions 31 RGGI see Regional Greenhouse Gas Initiative rise in greenhouse gas emissions 170 role of forests in abatement 27 subsidies for biofuels 148 target for biofuels 151 the cost of US-based carbon sequestration 94 timber plantations 85 US Agriculture Secretary, biofuels 157 US and EU targets for biofuels 146 US Congress, Kyoto Protocol 167

235

US Department of Agriculture National Agricultural Statistical Service 155 US Department of Energy 152 biofuels feedstocks 146 US Environmental Protection Agency (USEPA) 27, 160, 169, 170 forestry’s role in cap and trade 168 GHG savings of fuels 158 international action 170 modeling forestry 168 value of carbon in measured reforestations and old growth 130 Vatican, carbon neutrality 77 Verifiable Carbon Units (VCUs) 83 verification Australian forestry offset projects 83 carbon by measurement 134 CDM projects, DOE 49 verified emission reductions (VERs) 68, 76 voluntary carbon offsets market 183 Voluntary Carbon Standard (VCS) 79, 91, 112, 137, 138 carbon measurement protocol 137 CDM projects 83 CDM rules 181 measurement, additionality, buffer stock 83 REDD and buffer stocks 84 temporal mismatch of emissions 84 voluntary forestry offsets 182 buffer stocks 82 carbon neutrality 86 cost neutrality 87 ex ante accounting 82 future of 90 incremental crediting and debiting 89 MSC not offset 86 policy 88 prices 73 recommendations 89 registration 83 size of projects 77 social costs, ex ante accounting 89 temporal mismatch with emissions 84

236

Carbon sinks and climate change

voluntary market contribution to REDD 184 Waxman-Markey Bill H.R. 2454 214 weaknesses of the Kyoto Protocol in relation to forestry 35 wild populations loss 100 wildlife corridors 92 Pearl River Basin CDM project 110 Tanzanian CDM project 111 Williams on deforestation 200 willow for biofuels 161 wood biofuels, EU 159 pellets for biofuel 150 source of liquid fuels 150

World Bank 46, 50, 62, 64, 75, 92, 115, 116, 117, 144, 147, 149, 152, 183, 199, 203, 211, 212 buyer of forestry projects 46, 62, 75, 115, 181 CDM forestry project, China 59 funding of CDM forestry projects 181 pilot programs for REDD 214 purchase price CERS 50 subsidies for biofuels 157 World Business Council for Sustainable Development 75 World Resources Institute 75, 178, 186 carbon measurement protocol 137 World Trade Organization 101 world’s population 2050 99